The European Central Bank (ECB) looks set to ring in the new year with interest rates on hold, but will have its work cut out for it this year, analysts say.
The ECB’s policy-setting governing council is scheduled to hold its first meeting of this year on Thursday, but central bank watchers are not projecting any new measures just yet after a surprise rate cut in November last year.
“The ECB’s governing council appears unlikely to make any substantive policy changes at its first policy meeting of the year,” Jonathan Loynes at Capital Economics said.
“But the ongoing combination of weak economic growth, a damagingly strong currency and poor liquidity conditions will maintain the pressure on the central bank to take further action to support the region’s fragile economic recovery in 2014,” he said.
SURPRISE MOVE
The ECB took markets by surprise in November and pared back its central “refi” refinancing rate by a quarter of a percentage point to a record low of 0.25 percent.
The reason behind the move was an expectation that the single currency area is facing a prolonged period of very low inflation.
Area-wide inflation picked up fractionally in November, but analysts believe that does not sound the all-clear and the ECB may have to take further action again at some point.
There is “no immediate need to act,” Commerzbank economist Michael Schubert said.
“ECB council members signaled in recent weeks that they currently see no need for further measures,” he said.
“Against this backdrop we expect that ECB President Mario Draghi will merely emphasize once again that the ECB is ready to act,” Schubert said.
In addition to changing interest rates, the ECB could pump more liquidity into the financial system to get credit flowing again between banks and businesses, crucial if any economic upturn is to be sustained.
DECLINING LOAN RATE
For the moment, loans to businesses in the euro area are continuing to decline, new ECB data showed on Friday.
Private sector loans dropped by 2.3 percent in November in a year-on-year comparison, after already contracting by 2.2 percent in October, the ECB calculated.
The ECB already pumped more than 1 trillion euros (US$1.3 trillion) into the banking system at the end of 2011 and the beginning of 2012 to avert a potentially disastrous credit crunch.
However, the banks preferred to use the ultracheap cash to buy up sovereign bonds rather than lend it on to businesses and the ECB is considering ways of channeling the cash directly to businesses if it decides to open the liquidity gates once again.
CREDIT CRUNCH?
“The governing council obviously agrees that with possible further steps the ECB wants to provide targeted support to the real economy. But there seem to be differences of opinion as to what is the most effective way to reach this target,” Loynes said.
London-based Berenberg Bank chief economist Holger Schmieding said the weak credit data did suggest a possible credit crunch.
TARIFF TRADE-OFF: Machinery exports to China dropped after Beijing ended its tariff reductions in June, while potential new tariffs fueled ‘front-loaded’ orders to the US The nation’s machinery exports to the US amounted to US$7.19 billion last year, surpassing the US$6.86 billion to China to become the largest export destination for the local machinery industry, the Taiwan Association of Machinery Industry (TAMI, 台灣機械公會) said in a report on Jan. 10. It came as some manufacturers brought forward or “front-loaded” US-bound shipments as required by customers ahead of potential tariffs imposed by the new US administration, the association said. During his campaign, US president-elect Donald Trump threatened tariffs of as high as 60 percent on Chinese goods and 10 percent to 20 percent on imports from other countries.
Taiwanese manufacturers have a chance to play a key role in the humanoid robot supply chain, Tongtai Machine and Tool Co (東台精機) chairman Yen Jui-hsiung (嚴瑞雄) said yesterday. That is because Taiwanese companies are capable of making key parts needed for humanoid robots to move, such as harmonic drives and planetary gearboxes, Yen said. This ability to produce these key elements could help Taiwanese manufacturers “become part of the US supply chain,” he added. Yen made the remarks a day after Nvidia Corp cofounder and chief executive officer Jensen Huang (黃仁勳) said his company and Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) are jointly
United Microelectronics Corp (UMC, 聯電) expects its addressable market to grow by a low single-digit percentage this year, lower than the overall foundry industry’s 15 percent expansion and the global semiconductor industry’s 10 percent growth, the contract chipmaker said yesterday after reporting the worst profit in four-and-a-half years in the fourth quarter of last year. Growth would be fueled by demand for artificial intelligence (AI) servers, a moderate recovery in consumer electronics and an increase in semiconductor content, UMC said. “UMC’s goal is to outgrow our addressable market while maintaining our structural profitability,” UMC copresident Jason Wang (王石) told an online earnings
MARKET SHIFTS: Exports to the US soared more than 120 percent to almost one quarter, while ASEAN has steadily increased to 18.5 percent on rising tech sales The proportion of Taiwan’s exports directed to China, including Hong Kong, declined by more than 12 percentage points last year compared with its peak in 2020, the Ministry of Finance said on Thursday last week. The decrease reflects the ongoing restructuring of global supply chains, driven by escalating trade tensions between Beijing and Washington. Data compiled by the ministry showed China and Hong Kong accounted for 31.7 percent of Taiwan’s total outbound sales last year, a drop of 12.2 percentage points from a high of 43.9 percent in 2020. In addition to increasing trade conflicts between China and the US, the ministry said
RSS