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Foreign Exchange

Eurozone strategy: ECB cuts, but is it still behind the curve?

Analysts debate just how clued up Trichet and the council are to the problems of the real world.

The decision by the European Central Bank to cut its main refinancing rate by 50 basis points to an historical low of 2% on January 15 came as no surprise to the foreign exchange market. Nor did the slight weakening of the euro as a result.

The general perception that the ECB remains stuck behind the curve made it almost inevitable that whatever central bank president Jean-Claude Trichet and his colleagues decided to do, it would result in some kind of sell-off in the euro. A failure to move would have been taken as a sign that the ECB was totally clueless, while a bigger cut would have been taken as a tacit admission that the central bank was, at best, misguided in its earlier assertions about the state of the eurozone’s economy.

Struggling to catch up

Holger Schmieding, Bank of America’s chief economist, Europe, was critical in a snapshot analysis he sent out to clients just after the cut was announced. Schmieding states that the ECB was "struggling to catch up with reality", adding: "In the press conference, Trichet virtually ruled out a rate cut at the February meeting in three weeks’ time, referring to the ‘important rendezvous’ in March instead."

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