Mon, Jan 09, 2012 - Page 10 News List

ECB to hold rates steady to start the year, analysts say

AFP, FRANKFURT, GERMANY

The European Central Bank (ECB), after cutting interest rates for the past two months, is unlikely to do so again this month, analysts say, but additional cuts could still be on the cards later this year.

With a raft of recently surprising positive economic data, notably in Europe’s economic powerhouse Germany, the bank at its first meeting of this year on Thursday is expected to wait and see how its past moves to prevent a credit crunch and boost the economy in the 17 countries are actually having an effect.

Last month — on the same day that EU leaders met in Brussels in what was seen as a make-or-break crisis summit — the ECB brought eurozone borrowing costs back down to their previous historical low of 1 percent, effectively reversing last year’s two earlier rate hikes.

On top of that, it offered banks in the region an unlimited pool of liquidity by loosening collateral rules, cutting the minimum reserve ratio and launching new three-year loans at super-cheap rates.

“Given the magnitude of these measures, it is highly unlikely that the ECB will embark on additional moves at its upcoming meeting,” Commerzbank economist Michael Schubert said.

Austrian central bank chief Ewald Nowotny, who sits on the ECB’s governing council, also recently warned against “frequently churning out new ideas” without checking the impact of earlier moves, which in themselves constituted a “massive step.”

In fact, not all measures had already been implemented, Schubert said. The cut in the reserve ratio would not become effective before Jan. 18 and the next three-year tender was only scheduled for the end of next month.

Howard Archer, economist at IHS Global Insight, said the decision to cut rates last month was not by consensus, as is traditionally the case with the ECB, but by a majority vote, meaning some council members opposed it.

This “indicates that the ECB will probably be reluctant to trim interest rates again as soon as in January,” Archer said.

He predicted the ECB would trim interest rates by a further quarter point to 0.75 percent “in the first quarter ... and could very well come down as low as 0.50 percent in the second quarter of 2012.”

Jonathan Loynes, chief European economist at Capital Economics in London, similarly believes that “after two consecutive cuts in interest rates, the ECB looks set to hold fire at its first policy meeting of 2012 on January 12.”

Not only did ECB President Mario Draghi “disclose at the post-meeting press conference that last month’s decision was not unanimous, but the new staff economic forecasts still saw the risks to the inflation outlook as ‘broadly balanced,’” Loynes said.

The ECB also sees its role in the long-running debt crisis as firefighter, while it insists that it is up to national governments to find a long-lasting and sustainable solution.

Thus, while further interest rate cuts “are still possible in later months, Draghi is likely once again to dampen expectations that the ECB will take more aggressive action to address the debt crisis by significantly ramping up its purchases of peripheral sovereign debt,” Loynes said.

The ECB’s bond-buying program, launched under the previous president, Frenchman Jean-Claude Trichet, has been one of its most controversial moves since the start of the crisis, even causing two prominent German ECB members, including chief economist Juergen Stark, to quit.

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