The Federal Reserve?s reduction in the discount rate today raises the question of whether the European Central Bank will follow through with raising interest rates next month. The probability of an ECB rate cut has dropped from 90 percent two weeks ago to 25 percent today. Many banks have shifted their outlook and are now not calling for a September rate increase.
Today, ECB member Weber said that the central bank will do all that they can to ensure price stability and when asked whether the central bank still plans on raising interest rates or use strong vigilance on price risks, he declined to comment. This definitely suggests that the central bank could cancel its plans to raise rates next month. Economic data is showing signs of slowing alongside inflation. This morning?s German producer price data reflected a 0.1 percent monthly drop in July. ECB President Trichet has not shown any signs that he too is reconsidering the central bank?s earlier plans to cut rates. We will be watching his commentary closely in the next few weeks. Meanwhile, even though the German ZEW report is due for release next week along with GDP and Eurozone PMI, the data should take a backseat to the movements in the equity and bond markets. Switzerland also has a lot of data due for release including producer prices, trade balance and employment. Not many people have talked about whether the Swiss National Bank will still raise rates. At this point, we think that the chances are low.