Forex Flash: 50-60% chance of ECB cutting rate by 25bp in May – TD Securities

FXstreet.com (Barcelona) - TD Securities are increasingly biased toward a ECB rate cut by 25bp in May after the latest economic indicators, with the German IFO confirming yesterday’s PMI weakness: “So with France looking a touch better but still very weak into April, and German surveys heading lower again, we think that will be enough to get the ECB debating the potential for up to 50bps of cuts, but actually delivering a 25bps cut to the refi rate in May and leave the debate for further action until June”, wrote analyst Jacqui Douglas, adding that it’s still a close call, with odds in favor around 55-60%, so only slightly above even. “The ECB has been very reluctant to cut rates further, and surprised us by stubbornly holding off in December, despite reports that the majority of the Governing Council preferred to see a rate cut”, Douglas continued, “the biggest argument against a cut to the refi rate is the fact that it would have next to no impact on economic growth, with EONIA already trading so close to the bottom of the corridor”. But, lack of demand stemming from uncertainty is a large part of the problem and “a rate cut from the ECB could help at the margin to support confidence, and show that the ECB’s toolkit is not yet empty, as well as cheapen carrying costs for those with LTROs outstanding”. “And it certainly won’t hurt anything, so a rate cut would make for better optics than what appears to be an increasingly impotent ECB”, Douglas concluded.