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April 25, 2013 3:15 pm
Mounting gloom about the outlook for the eurozone economy has led to calls for the European Central Bank to cut interest rates to help stimulate growth, possibly as early as next week. But will the ECB take heed – and will lower borrowing costs be enough?
Mark Wall, co-head of European economic research at Deutsche Bank, says that with this week’s German data in particular having come in below expectations, he now believes the ECB will cut its refinancing rate by 25 basis points to 0.5 per cent at its meeting on May 2.
“The second and third consecutive declines in the German Ifo and PMI are difficult to ignore,” he says. “Bundesbank chief Jens Weidmann’s comment last week that a rate cut was possible ‘if the data warrant it’ was meaningful in that it came from the ECB’s senior hawk.
“The ECB is unlikely to overestimate the benefits of cutting the policy rate by 25bp. In preparing expectations for a cut, it probably knows that more than 25bp are required to bring the baseline economic scenario back on track.
“With only 75bp of potential cuts available before hitting zero, the ECB is likely to favour two quarter point cuts, one in May and another in the summer.”
Stephen Lewis, chief economist at Monument Securities, thinks the ECB will hold fire next week. “For ECB policymakers, the prime challenge is to find how to transmit the already highly accommodative monetary policy stance to all parts of the eurozone,” he says.
“Partly, this is a matter of reducing interest rate spreads between member states. The ECB can claim some progress in this direction – although narrower spreads in the government bond markets do not necessarily increase banks’ willingness to lend.
“The ECB’s priority seems to be to find ways of improving the transmission of monetary ease throughout the eurozone, especially to small and medium enterprises. A majority on the ECB’s governing council would probably prefer to delay considering a rate cut until such measures are in place.
“The ECB’s June policy meeting, when revised staff forecasts for the economy will be presented, seems a natural time for council members to give consideration to cutting rates.”
Steve Barrow, currency analyst at Standard Bank, says he expects the ECB to cut the refi rate by 25bp next week – but argues that the eurozone economy is so weak, and deflationary pressure remains such a force, that the region has moved beyond the need for lower rates.
“Whatever the ECB does with rates, it won’t be enough,” he says. “We feel that the monetary policy debate in the eurozone has moved on to the need for more non-conventional actions, such as quantitative easing.
“To many in the ECB this is anathema. They would presumably point to the early repayment by many banks of some, or even all, of their borrowings from the longer-term refinancing operations as a sign that there’s no need for more aggressive action.
“But of far more use than simply cutting rates would be QE, alongside some effort to unclog credit channels, especially for smaller firms that have no access to bond financing.”
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