Trying to Catch Up, ECB Slashed Interest Rate By 75 bps, The Biggest Cut Ever

It's indeed a good news that the ECB reduced its main refinancing rate by a larger-than-expected 75 bps to 2.5%. Although this is already the most aggressive move in ECB's 10-years history, we believed it's justified as economy slumped very seriously and inflation was lower during the period.

In the press conference, the ECB President Trichet stated

1. Crisis has spread from financial sector to the real economy across the broad since September. Economic data for October and November signaled the condition has weakened further during 4Q08
2. Inflationary pressure has been diminished since last meeting. Given the fall in commodity prices and slowdown demands, annual HICP is expected to decline further in the coming months and to be 'in line with price stability'. This should help support purchasing power of incomes and savings
3. Outlook remains highly uncertain. The Governing Council will continue to monitor all developments closely to keep inflation expectation within target in the medium-term so as to support sustainable growth and financial stability
4. According to the December 2008 Eurosystem staff macroeconomic projections for the euro area, annual real GDP growth is expected to be 0.8% to 1.2% for 2008, -1% to 0% for 2009 and 0.5% to 1.5% for 2010. However, these forecasts are subject to downside risks. Inflation is expected to be around 1.4% in 2009 and 1.8% in 2010
5. When asked about quantitative easing, the President said they can and will do what's needed.

During the deep recessionary condition like this one, we believe rates should come down further. Since most of the economic data released recently surprised us on the downside and the ECB statement remains dovish, we expect more rate cuts to follow and think that the policy rate may reach 2% before Mar 09.