The European Central Bank cut interest rates to an all-time low of 1.5% on Thursday, keeping up a record pace of reductions as the euro zone economy slides deeper into recession.
All but two of 78 economists polled by Reuters [ECB/INT] last week predicted the 50 basis point move, which took euro zone rates down from 2.0%. The European Central Bank has now slashed borrowing costs by 275 basis points since October.
Money market traders and other financial players had also fully priced in the cut, steered by dire euro zone economic data in recent weeks and a steady stream of hints from policymakers. It takes rates to the lowest level in the ECB’s 10-year history.
But analysts expect the central bank to keep cutting in the next few months as the financial turmoil and recession exert a tighter stranglehold on the euro zone.
“Fifty basis points is exactly as expected but there are a lot of critical issues that we look to be addressed at the press conference,” said Barclays Capital economist Julian Callow.
The euro pared losses against the US dollar after the decision and June Bund futures trimmed gains. ECB President Jean-Claude Trichet will meet the media at 1330 GMT with economists eager to hear the bank’s latest in-house forecasts for the economy and inflation.
“I think the tone of the press conference will be dovish leaning. I think that is unavoidable given how big the downgrades in GDP and inflation projections are likely to be, which should set the stage for further (interest rate) easing in Q2,” said Callow.
The action is unlikely to stop there. Economists also expect the ECB to renew its promise to support money markets through sickness and back into health.
There is also hope Trichet will hint the ECB is closer to deciding on other ways to boost the struggling euro zone economy once it runs out of ammunition as interest rates head towards zero.
“What will really be interesting is what Trichet says about potential non-conventional measures,” said UBS economist Stephane Deo. “The question is what else they can do? They could buy paper on the market, they could intervene more on the money markets and there is talk about clearing houses for certain assets.”
Policymakers Axel Weber and Christian Noyer said this week that the ECB is weighing up all options, including buying short-term commercial debt.
The Bank of England announced plans to buy assets on Thursday after also cutting rates by 50 basis points, to a record low of 0.5%. However, some analysts think the ECB will hold its fire for now.
“I think it’s still too early to say anything in terms of unconventional measures like asset purchases,” said Citi economist Juergen Michels. “Especially when there is still some room to go with interest rates.”
Callow agreed. “The famous issue of quantitative easing will be addressed but I wouldn’t expect any significant progress to be announced. I think the ECB will have enough to digest with all the staff forecasts and the fact it will also publish its own accounts.”
The bank’s staff are expected to slash their in-house 2009 and 2010 economic forecasts to reflect the break-neck pace of deterioration in the euro zone.
Back in December staff forecast GDP ranging from no change to a 1.0% fall this year, and growth of between 0.5 and 1.5% next year. But Executive Board member Juergen Stark said recently he expects the new forecasts to be in line with IMF forecasts of a 2% contraction this year.
Official data on Thursday confirmed the euro zone’s economy suffered the worst quarter on record at the end of 2008. Other surveys have also shown confidence is at an all-time low, while the bloc shed more than quarter of a million jobs in January.
Inflation projections are also expected to be cut. Last time staff saw inflation of 1.1 to 1.7% in 2009 and 1.5 to 2.1% in 2010.
Analysts now expect it to average well under 1% this year and stay below the ECB’s target of close to, but below, 2% in 2010. Economists will also be looking out for hints from Trichet about how low the ECB really is prepared to go with rates.
So far, a majority of policymakers have said they don’t want follow the US Federal Reserve and Bank of Japan and cut rates to the bone. Weber, who heads the German Bundesbank, became the first to draw a line in the sand at 1% last week while Trichet has said that there would be a number of disadvantages if interest rates were at zero percent. (Reuters)