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ISEQ steady-Rate drop likely next month?

Friday, May 09 09:08:55

The ISEQ is steady this morning at 4,921, down 4 points as World markets mark time following some gains yesterday.

Davy Stockbrokers considers yesterdays ECB comments and the likelihood of a rate fall next month:

The ECB announcement of no change to monetary policy yesterday was initially given a muted reaction by markets.

The euro climbed to nearly 1.40 against the dollar, ahead of the president's press conference, but quickly plunged to $1.385 as Draghi gave the most emphatic signal yet that the ECB was ready to act at the June meeting. Draghi indicated that the ECB was "comfortable with acting next time", with the only impediment to action yesterday the upcoming forecasts in early June.

At this juncture, the Governing Council may have decided to wait for the updated inflation forecasts in early June before deciding to act. Those forecasts should indicate that inflation will undershoot the ECB's medium term target of 2 PC - providing the final catalyst for the Governing Council to act. So attention will now turn to how the ECB might act.

It appears unlikely that the ECB will choose an unconventional measure such as negative interest rates but could push the main refi rate to zero from 0.25 PC. Instead, the most likely course of action will be some form of asset purchase programme, an idea mooted by Draghi at last month's meeting. This could take the form of large-scale government bond buying or a mixture of government and corporate bond purchases.

Following the ECB and Bank of England's policy decisions yesterday, there will be little market moving macro data in Europe today. In the UK, industrial production is expected to remain unrevised from the initial GDP estimate of -0.2 PC in March. However, stronger growth earlier in the quarter means output is still up 2.4 PC on the year according to Davy Stockbrokers.