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Interest Rates, ECB and Financial Markets

Interest Rates, ECB and Financial Markets

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Interest Rates, ECB and Financial Markets

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  1. Interest Rates, ECB and Financial Markets Presented by: Paul McDaid Dominic King Iarla Davoren Conor O’Brien

  2. Introduction... • ECB and Interest rates... • Why Financial Markets expect cut? • What reduction is expected... • Other options...

  3. Interest Rates Set by national governments and Central Banks… Governing Council of ECB set rates… Objective: Maintain Price Stability…

  4. Decline of Interest Rates • ECB Vs Bank of England

  5. Why do Financial Markets expect a cut? • Trichet’s comments… • Fall in inflation… • Leading Eurozone indicators…

  6. Monetary Policy • Monetary Policy… • Interest Rates – Key tool of Monetary Policy… • Expansionary Monetary Policy

  7. Effects of lower Interest rates Reduces the cost of borrowing... Aims to stimulate borrowing by banks and consumers... Stimulate economy with increased economic activity...

  8. Effects of lower interest rates • Encourage consumption, not saving... • Increase demand for goods and services... • Increase investment, production and employment...

  9. Economic Data • Euro-zone recession... • Rising unemployment... • Contracting industrial activity... • GDP forecast to contract in 2009... • Germany...

  10. Inflation

  11. Disinflation • Inflation 1.2% in February... • Commodity prices... • Weakening global demand... • Contraction in credit growth...

  12. Monetary Data • Contraction in M3 money supply growth... • Credit crunch... • Fall in loans to private sector and households... • Interbank Lending...

  13. Why financial markets expect a 50bps cut? • Unrest in the governing council... • 50bps cut is most likely as it would act as compromise... • Support of lower rates Vs Fear of lower rates...

  14. Why financial markets expect a 50bps cut? Trichet Comments (February) : “ It would probably be more the first figure that you have mentioned”

  15. Why not a 1% cut? • More options with 50bps... • Gradual cutting over slashing... • Don’t want to appear panicked... • More than 50bps heading to quantitative easing...

  16. How the Rate Cut Affects Financial Markets… Euribor... Weaker Euro... Debt... Volatility in stock market...

  17. Euro vs Dollar

  18. What next • Further cut in interest rate… • Liquidity Trap? • Unconventional Monetary Policy... • Quantitative Easing