ECB lending rate headed for fourth straight cut: experts | india | Hindustan Times
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ECB lending rate headed for fourth straight cut: experts

india Updated: Jan 15, 2009 15:43 IST
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The European Central Bank is set to cut its main interest rate on Thursday for the fourth time in a row amid hardening expectations of a deep recession in the 16-nation eurozone.

Most analysts expect the ECB's governing council to lower its benchmark interest rate by a half percentage point to 2.0 percent.

"Amid mounting evidence that the economy is contracting at record speed, we continue to expect a 50 basis point (0.50 percentage point) ECB rate cut," said Bank of America senior economist Holger Schmieding.

One of the latest gloomy indicators was eurozone industrial output, which plunged by 1.6 per cent in November from the previous month, bringing the slump over a year to 7.7 per cent -- the biggest drop since records began in 1990, the European Union's Eurostat data agency said Wednesday.

A second was the downgrade of Greece's sovereign debt to A-minus by the ratings agency Standard and Poor's, which warned Ireland, Portugal and Spain that their finances were under scrutiny as well.

Steve Butler, director of foreign exchange at Scotia Capital in Toronto said "there were a lot of warning shots fired by S and P recently so to see them actually downgrading someone is a little worrying."

Greece now has the lowest rating of any eurozone member and will have to pay more this year for funds on crucial bond markets, which could become saturated as countries seek huge amounts of cash for their economic stimulus packages.

Meanwhile, foreign exchange markets have also pencilled in an ECB rate cut, but it could still be a smaller one of 0.25 per centage points.

Analysts at Barclays Capital in London said the euro would come under pressure if the ECB gradually lowered eurozone interest rates in the coming months, reducing the currency's yield advantage over the dollar and yen.

"We continue to expect the euro-dollar to head lower in the coming months," they wrote in a research note as the single currency traded a little below 1.32 dollars.

UniCredit Group economist Marco Valli said: "We certainly think the current situation requires much more agressive action," than a cut of 0.25 per cent.

UniCredit expects the ECB to take its benchmark rate down to 1.0 per cent this year, while others see the floor at 1.5 per cent.

To date, the central bank has never gone below 2.0 per cent.

But economic prospects for the recession-hit eurozone this year are bleak, with a forecast contraction in output of 0.6 per cent this year, according to the Paris-based Organisation for Economic Cooperation and Development.

"We have not seen the worst," said Angel Gurria, OECD secretary general, on Wednesday.

He underscored a continuing contraction in housing markets and slumping demand for European exports, but said that on the positive side, "we expect the ECB to reduce interest rates further."

Central bank president Jean-Claude Trichet and other ECB directors have opened the door to a rate cut in recent press interviews, and inflation -- the bank's main concern -- is now at 1.6 per cent, well below the target of just under 2.0 per cent.

OECD economist Nigel Pain said the organisation "doesn't exclude deflation in the very short term if the fall in inflation is more rapid than expected."