ECB Steadfast, but Looser

Comments by European Central Bank President Jean-Claude Trichet were seen today as reaffirming market expectations for an eventual loosening of monetary policy in Europe.

To be sure, Trichet remained steadfast in his stance on inflation, but he also hinted at a change in sentiment at the ECB, noting, for example, that "there was no call for an increase or a decrease in rates." That marks a change from previous meetings when some ECB members sought an increase in interest rates.

Important to many was the fact that Trichet reiterated his belief that there are downside risks to growth, which was seen today as an effort to show the ECB was placing greater emphasis on these downside risks.

Trichet's remark about the interdependency of the world's economy also received attention, with Trichet remarking that "I never subscribed myself to the theory of decoupling. I have always said that we are in a world that is interdependent."

Trichet's comments have had an impact on rate-cut odds in Europe. Euribor contracts, which are futures contracts that reflect expectations on three-month interbank rates in Europe, have moved fairly sharply on the day.

For example, the June 2008 contract has fallen 17 basis points on the day to 3.76%, a level that indicates roughly 100% odds of a 25-basis-point cut from the current benchmark rate of 4%, and nearly 100% odds of a cumulative 50 basis points in cuts (Euribor trades at a spread to the ECB's benchmark rate).

For the end of 2008, the market is priced for the ECB to lower rates by between 75 and 100 basis points, 17 basis points more than was priced in Wednesday.