Mon, Jun 04, 2012 page10

• ECB might cut rates as eurozone crisis deepens

  • AFP, FRANKFURT, GERMANY
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  The European Central Bank (ECB) might cut interest rates again soon as the eurozone debt crisis deepens, but it will continue to insist that it is up to governments to find a lasting solution, analysts say.

  ECB watchers predict the central bank — which will hold its regular policy-setting meeting on Wednesday instead of Thursday, owing to a public holiday — will not alter borrowing costs just yet this month.

  However, it could act next month as deepening fears about Greece and possible contagion to other countries push the 17 countries that share the euro back into recession, the analysts predicted.

  

  European Central Bank President Mario Draghi, center, participates in the European Parliament Economic and Monetary Affairs Committee in Brussels, Belgium, on Thursday.

  Photo: Reuters

  “The further escalation of the eurozone crisis has intensified the pressure on the ECB to take further remedial action,” Capital Economics chief Europe economist Jonathan Loynes said.

  “But while [ECB] President [Mario] Draghi may hold open the prospect of further support of the region’s banks after the meeting on June 6, he is likely to insist again that it is up to national policymakers to address their broader economic and fiscal problems,” Loynes said.

  The ECB has never hesitated to act, from the very beginning of the crisis.

  It quickly reversed last year’s rate hikes to bring eurozone borrowing costs back down to an all-time low of 1 percent and embarked on a hotly contested program of indirectly buying up the bonds of debt-mired countries.

  Most recently, in two so-called long-term refinancing operations in December last year and February, it pumped more than 1 trillion euros (US$1.25 trillion) into the banking system to avert a dangerous credit squeeze in the eurozone.

  “Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no,” Draghi said again during a hearing at the European parliament last week.

  The ECB says that its overriding priority, even in times of crisis, is to keep a lid on inflation in the single currency area.

  The latest data indicate that price pressures are indeed under control — area-wide inflation slowed to 2.4 percent last month from 2.6 percent in April and in Germany, the bloc’s biggest economy, inflation slowed to 1.9 percent, its lowest level in 17 months.

  Further up the inflation pipeline, too, the money supply expanded by just 2.5 percent in April, a sharp slowdown compared with the previous month, despite the huge amounts of liquidity pumped into the system via the ECB’s anti-crisis measures.

  “With the inflation threat receding, the ECB has more scope to stimulate the economy,” Berenberg Bank chief economist Holger Schmieding said.

  The ECB will also publish its latest quarterly staff projections on inflation and economic growth on Wednesday.

  They are likely to be revised downward, “leaving the door open for further policy accommodation,” Newedge Strategy analyst Annalisa Piazza said.

  She saw a “60 percent chance” that the ECB would trim its rates by a quarter of a percentage point to 0.75 percent as early as this month.

  Nevertheless, “the timing of a rate cut is highly uncertain,” the analyst said.

  While the “weaker fundamentals and increasing stress in financial markets fully justify a quarter-point cut this week, the ECB might decide a later cut is the best tactical option” because borrowing costs are already at record lows and the full effects of the anti-crisis measures have yet to unfold, she said.

  Schmieding, too, saw a “good case” for a quarter-point rate cut.

  However, the bank would probably wait until next month, by which time the outcome of the Greek parliamentary elections on June 17 will be known, the economist said.
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