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ECB will set record-low interest rates, analysts say

The European Central Bank is meeting to discuss how to restore European economies to health and is likely to reduce interest rates to record lows, analysts say. The ECB's main lending rate is at 2.0% but is expected to drop to 1.5%.

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AFP - The euro zone is set for record low interest rates as the European Central Bank (ECB) meets Thursday to coax 16 afflicted economies back to health, analysts say.

The ECB's main lending rate now stands at 2.0 percent but that is almost sure to fall to 1.50 percent before the ECB releases fresh growth and inflation forecasts by central bank staff, which are also expected to be revised lower.

"The ECB will surely decide a further rate cut leading to the main refi (refinancing) rate to 1.50 percent, a historically low level" in the bloc's 10-year existence, Natixis economist Cedric Thellier said.

December's growth estimate was deemed obsolete almost upon its release and the previous mid-point forecast of a 0.5 percent contraction this year will certainly be cut sharply, possibly to minus 2.0 percent.

In addition to an "obviously strong downward revision for GDP" (gross domestic product), Thellier said the previous 2009 inflation forecast of 1.4 percent would be slashed in half to 0.7 percent.

The Bank of England (BoE) is expected to cut its own interest rate from 1.0 percent to 0.50 percent in London, also a record low for the 315-year-old bank.

Analysts there will focus on plans to pump more cash into the recession-hit British economy via measures known as quantitative easing or QE -- basically running money printing presses overtime -- to encourage activity.

"All the attention is on the likely release of the details of the QE strategy the bank is ready to implement," a UniCredit research note said.

Elsewhere, the US Federal Reserve and Bank of Japan's main rates are essentially already at zero, and the Fed has begun to buy commercial paper directly from businesses in a classic example of quantitative easing.

With influential ECB governor Axel Weber, who is also head of the German central bank, suggesting euro-zone rates will go no lower than 1.0 percent, analysts wonder how the central bank can stimulate the recession-hit economy.

Euro-zone GDP shrank 1.5 percent in the last quarter of 2008 and is forecast to slump further early this year, while inflation remains tame at 1.2 percent, well below the ECB's target of just under 2.0 percent.

That option of buying commercial paper is less clear-cut for the ECB, which must operate in 16 separate countries, but bank president Jean-Claude Trichet should address the QE issue at a press conference following the rate decision.

Capital Economics economist Jennifer McKeown did not expect firm details from the bank however, and said wavering could lead to a longer recession in the 16-nation bloc.

"The bank will still be relatively vague about the scope for unconventional measures to support the economy when interest rates can fall no further," she said.

"This raises the danger that the euro-zone recession might be longer-lived than elsewhere."

 

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