ECB bucks the trend

8 February 2008

MADRID – In the wake of the Bank of England’s move to cut interest rates by a quarter of a percentage point, the European Central Bank’s decision to hold rates steady took investors by surprise even though most analysts had predicted the institution headed by Jean-Claude Trichet would hold firm. The result was that, after opening calmly, European markets succumbed to a selling spree immediately after the ECB’s decision was announced as investors hoping for a rate cut and a rebound hastily pulled out. Trichet’s confusing comments afterwards did little to calm jittery nerves.

In Spain, the Ibex 35 fell 1.13 percent, returning once again to a precarious level below 13,000 points. Unusually, however, the Spanish market performed somewhat better than the rest, as Frankfurt dropped 1.66 percent, Paris gave up 1.92 percent and London tumbled 2.58 percent.

Trichet told investors that "uncertainty about the prospects for economic growth is unusually high" and that the inflationary pressures on consumer prices may start to dissipate, leading many to conclude that the ECB president is opening the door to rate cuts over the coming months if growth continues to slow and inflation eases. Even so, few investors are looking that far in advance. For many, the complex balance between inflation and growth and their effects on corporate results have turned into too complex of a variable to risk playing the market at the present time. Tellingly, Santander’s announcement that it will pay a EUR 0.28 dividend on 2007 results in May was totally ignored.

Forecasts that the US economy may grow by an anaemic 1 percent during the first half of the year also contributed to gloomy atmosphere, even though that would mean the world’s largest economy has avoided a recession – for now.

Subject: Spanish news