Central bank and government attempts to rescue the financial system are working and confidence is poised to recover, European Central Bank policymakers said on Friday.
On yet another day of tumbling stock markets and see-sawing currencies, ECB policymakers said the volatility had nothing to do with whether a string of rescue plans were working or not. “If you add the extra strong measures taken by the Eurosystem and the French government measures, it is clear that it will have a very strong impact,” said ECB Governing Council member Christian Noyer after meeting local business leaders and bankers near Paris. Still, Bank of England Deputy Governor Charles Bean said in an interview published on Friday that it was still early days in terms of the impact of the crisis on the real economy. In the same vein, ECB Governing Council member Ewald Nowotny said although the worst of the financial crisis was now over, the prospect of a long European recession could mean further ECB interest rate cuts.
France’s Noyer called for composure and pointed to a gradual easing in money market rates as evidence that measures by central banks and governments were working. “How much time that will take (and) how things work out will also depend on the international economic environment ... but I believe the psychological impact is already there,” he said. His comments were echoed by Belgium’s Guy Quaden, who said government actions to tackle the crisis have laid the groundwork for a pick-up in confidence. In a speech to a bond market conference on Thursday night, Quaden said that high distrust among banks meant interbank lending remained tight. But central banks would do their utmost to support market liquidity for as long as necessary. “The Eurosystem has assumed an increasing intermediation role during this period of turbulence. With its actions and the guarantees offered by individual governments, conditions are in place for a pick-up in confidence,” Quaden said.
ECB Executive Board member Jose Manuel Gonzalez-Paramo also urged calm, saying market developments should not be taken as revealing “the true underlying reality.” “Let’s keep calm. Authorities can contribute to the worsening of confidence if they try to muddle through or panic, abandoning what their mandates are,” he said in Madrid.
The ECB cut interest rates by 50 basis points on October 8 to 3.75% in tandem with other major central banks, and analysts expect further loosening given a slump in economic growth is dampening pressure on inflation. “While inflation remains relatively high, upside risks have moderated. We expect inflation to fall more quickly than previously foreseen,” said Gonzalez-Paramo.
Economists expect rates to hit 3.25% by the end of the year, with many major banks including Goldman Sachs shifting their call for a cut to come in November rather than December as previously expected. “If this morning’s drastic sell-off in equities should be extended into next week, there is a considerable probability of the ECB cutting rates before their November meeting, simply to signal that they are flexible and not tied down to a pre-set meetings schedule, even for unilateral rate cuts,” Goldman Sachs economist Erik Nielsen said. Some even say that should global markets spiral further down, then the world’s leading central banks could again coordinate rate cuts even before scheduled meetings take place as they did on October 8.
Austria’s Nowotny told CNBC it was difficult to predict whether the euro zone was entering an L-shaped or long recession. Asked whether the ECB could cut rates further, he said: “From the point of view of the ECB, we have our special mandate and we have to follow this so, in some cases, it might be a good thing to be coordinated and in other situations it might be necessary to go it alone.”
Gonzalez-Paramo said there was close cooperation to restore calm to markets, although he would not be drawn on further cuts. “We have seen cooperation (between the ECB and US Federal Reserve) becoming more intense and of a different quality. We have intensified collective monitoring and have taken coordinated steps to provide liquidity,” he said. (Reuters)