ECB to cut rates, explore 'non-standard' policies

Tuesday, March 31, 2009 at 9:25 PM Posted by Beijing News


The European Central Bank is expected to cut its key interest rate to an all-time low Thursday and may venture onto entirely new ground as it seeks ways to ease a deepening recession.

It is "already clear to everyone that the refi refinancing rate will go lower but not much lower" than the current level of 1.50 percent, UniCredit chief eurozone economist Aurelio Maccario said.

"The focus has now shifted to the type of other unconventional measures the ECB is ready to embark on," he said.

Efforts to pull the 16-nation eurozone out of its first recession are set to take the ECB further into murky waters called quantitative easing, essentially the creation of money to boost economic activity.

The US Federal Reserve, Bank of England BoE and Bank of Japan have blazed a trail by unveiling schemes costing trillions of dollars to buy government and corporate debt and high-risk, mortgage-backed securities.

The ECB, however, is a pragmatic central bank and has focused on the eurozone banking sector, which handles business financing on a much greater scale than elsewhere.

The central bank's first move now is almost certain to be a doubling of the maturity of refinancing operations, which provide unlimited funds to commercial banks at fixed rates, to one year from six months.

This "is the natural next step in the bank's current strategy of working through the banking system rather than sidestepping it as the Fed and BoE have begun to do," Maccario said.

A serious hurdle to boosting eurozone activity is a credit squeeze brought on because banks still do not trust each other enough to lend large amounts of cash over relatively long periods.

Unlimited central bank funds with a one-year maturity would ease the banking sector's need for cash.

"The ECB is now fully aware that this is a pernicious crisis whose effects -- especially in terms of mistrust among market participants -- are extremely difficult to dissipate and it is now reacting accordingly," Maccario said.

Eurozone economic perspectives have turned increasingly gloomy since late 2008 when the world was rocked by US investment bank Lehman Brothers' collapse.

The ECB surprised markets last month when it slashed its 2009 eurozone forecast to a contraction of 2.7 percent but since then analysts have said the economy could in fact shrink by 4.0 percent.

European consumer and business confidence slumped to its fourth consecutive record low in March although the pace of decline slowed in a possible sign of stabilisation, an EU survey showed on Monday.

Inflation has also plunged meanwhile, hitting a record low of 0.6 percent in March, far below the ECB's target of just under 2.0 percent.

The drop brought 12-month eurozone inflation to the lowest point on records going back to 1996 and gave the bank leeway to cut interest rates further.

The ECB would rather not cut its main interest rate too low however because the lower it goes, the less traction it gets.

While economists do not expect such a policy to be announced on Thursday, the door is now clearly open.



giant advertisement in Tokyo. AP/Katsumi Kasahara

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