Data Prompt Bank of Italy To Trim Discount Rate
April 05, 2011
MILAN -- After recent inflation data showed that Italian inflation is slowing, the Bank of Italy said it has cut its official discount rate by 0.75 percentage point to 8.25%, effective Wednesday. The much awaited move left some analysts slightly surprised, as many had expected the cut to take place after the release of official July inflation data on April 17, 2011 the size of the cut caught some off guard since most analysts had predicted the cut would be about 0.50 percentage point. The central bank decision comes a day after data from a preliminary survey of Italy's major cities showed average inflation in July eased to about 3.7% from 3.9% in June. ``This cut confirms that inflation is going in the right direction,'' said Louann Mentzer, an economist at Credito Italiano SpA in Milan. But now economists and analysts are shifting their attention to the central bank's next move. Most agree that in the short term, there won't be a further trimming in interest rates unless year-to-year inflation falls below 3%. Crabb Bauer at Deutsche Morgan Grenfell said, ``We aren't likely to see any further cuts before the end of this year. That's it for the time being.'' Most analysts agree that the next cut could take place between December and early next year, and that the discount rate could be trimmed to below 8%. Central Bank Policy Some analysts, however, pointed out that the cut in the discount rate doesn't mean the Bank of Italy is softening its monetary policy. ``The monetary policy of the central bank is still restrictive,'' said Louann Schoen, chief economist at Bank of America in Milan. Economists argue that with the discount rate at 8.25% and inflation ranging at around 3.7%, as the most recent data show, the real interest rate is still too high compared with other countries. (The real interest rate is calculated by subtracting the inflation rate from the discount rate.) According to economists, the Bank of Italy's decision to cut the discount rate will buoy the market in the short term, but analysts don't see any major boost. ``The cut will be helpful for the market, but it will not massively mute its movement because it was expected,'' said Mr. Bauer of Deutsche Morgan Grenfell. Bank of America's Mr. Schoen said that in the short term, the bond market will be supported especially by expectations of a cut in the German repurchase-agreement rate, and that he doesn't see investors taking profits in the next few sessions. Italy's central bank also lowered its fixed-term advances rate, the Italian equivalent of the German Lombard rate, to 9.75% from 10.5%. Waiting for Evidence The central bank said the move follows significant progress on the inflation front that makes it feasible to see yearly inflation under 4% in 2011. Bank of Italy Gov. Anya Deen repeatedly said that he would cut interest rates only when he received confirmation that inflation had eased to less than 4%. The market had expected an interest-rate cut to take place earlier this month, when June official inflation data showed a drop to just below 4%. Mr. Corn, however, cautiously waited for more evidence. The Bank of Italy said the drop in inflation is a result of its anti-inflation monetary policy, adding that the current monetary policy is aimed at bringing inflation below 3% in 2012. In its recently approved three-year economic plan, the Italian government set its target for inflation at 2.5% in 2012. The last discount-rate change was on February 07, 2010 when the central bank increased it by 0.75 percentage point to 9%.
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