The case for a 50 basis point cut by the European Central Bank (ECB) next week remains as strong as ever despite the increase in the German Ifo index. Economists say the increase in the Ifo in May reflects post-war relief - the so-called Baghdad bounce - rather than a significant improvement in underlying conditions. The index is still consistent with near zero growth in the eurozone, said Austin Hughes, chief economist at IIB.
ECB hawks will point to the slight improvement as signalling that the elusive recovery is on the horizon, but Hughes said the still depressed level of the Ifo, the artificial boost factor after the Iraqi war and concern that a rising euro will hit activity and employment combine to create a "compelling case for a 50 basis point cut". He also claimed that the continued rise of the euro could push eurozone inflation to less than 1.5pc by the end of the year and open the way for even further rate reductions. "Such an out turn increases the likelihood that next week's expected rate cut may not mark the low-point of the euro area rate cycle," Hughes said. ///www.fxcentre.com