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ECB set to trim rates, decide on alternative steps

ECB set to trim rates, decide on alternative steps
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First Published: Thu, May 07 2009. 01 45 PM IST
Updated: Thu, May 07 2009. 01 45 PM IST
Frankfurt: The European Central Bank is widely expected to cut interest rates on Thursday to 1.0% but markets are more focused on any alternative measures it reveals to get the euro zone economy back on its feet.
Analysts polled by Reuters were unanimous that the ECB would cut rates by 25 basis points to a fresh record low, finishing a job they had expected it to do last month.
The decision will be announced at 1145 GMT. There is a strong feeling that this will be the final cut in a cycle where the Governing Council has slashed the refi rate from 4.25% since last October.
Several policymakers have said they are unwilling to go below 1% for practical and psychological reasons. Attention is now turning to the ECB’s stance on extra steps, such as the asset purchases adopted by other central banks.
President Jean-Claude Trichet has promised to reveal after the meeting what, if any, further unconventional tactics it will use. Judging by recent public comments, policymakers went into the meeting at 0700 GMT still split on what to do.
Comments from some, including Axel Weber and Juergen Stark, suggest that the ECB is likely to double the maximum period that commercial banks can borrow funds to 12 months.
Economists had expected this announcement last month, just as they had predicted a 50 point rate cut to 1% at the Council’s April meeting, when it delivered only 25 points.
Weber, who heads Germany’s Bundesbank, has also suggested that any move on extending loan maturities should come with a guarantee that interest rates will not be cut further.
Other ECB members, including vice-president Lucas Papademos and Athanasios Orphanides, have floated a bolder approach of buying assets such as bank bonds or commercial paper.
Economists are equally divided on the ECB’s likely path.
“The big focus will be on what measures Trichet announces as regards a possible step towards quantitative easing,” said Mark Miller, a senior economist at Bank of Scotland. “Extending the maturities (on borrowing) is one of the safer bets but I personally feel the ECB will take a route of buying private sector assets, for example higher quality corporate bonds.”
Others think the bank will shy away from such a big step, at least for now. “Although some ECB board members have advocated the buying of corporate bonds or commercial paper, some national central banks are sceptical. The mixed experience of the Bank of England boosts the arguments of the latter group,” said Nomura analyst Laurent Bilke.
Some analysts expect something in between, with the ECB extending its lending maturities but striking a compromise by building in the option to buy assets if the economy worsens.
“Although the Governing Council will not rule out the option (of asset purchases), buying private sector debt securities seems to be regarded as a plan B,” said Fortis bank economist Nick Kounis.
Bank of England policymakers are expected to leave UK rates unchanged at 0.5% on Thursday and interest is focused on the BoE’s progress report on its own programme of asset purchases.
The euro was down in early trade from Tuesday’s month-high of $1.3439 against the US dollar.
Economists will also be scour Trichet’s comments at his 1230 GMT news conference for hints that the ECB has spotted any green shoots of economic recovery. Policymakers in the US and Britain have tentatively flagged such signs.
Better-than-expected euro zone business and consumer sentiment this month, alongside improvements in closely-watched forward-looking indicators such as PMI and business activity data have sparked hopes that the worst of the recession is over.
But the European Commission this week predicted the euro zone economy would shrink 4% this year and 0.1% next year, well below the ECB’s current worst-case scenarios.
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First Published: Thu, May 07 2009. 01 45 PM IST