Another 50bps now and much more to come

Severe strains in financial markets and a rapid deterioration in economic conditions have finally prompted a turnaround in the ECB’s previously hawkish stance. This supports our long-held view that interest rates will fall further than markets have been expecting. President Trichet has already suggested that rates will be cut this month and we doubt that he will disappoint market expectations of a 50bp reduction. Thereafter, we see interest rates falling all the way to 1.5% next year.