ECB heads for record low interest rates
2009-03-04

Category Interest Rates Nations Poland Hungary Category Regions Regions Europe Company Bank of England Category European Central Bank US Fed Reserve

FRANKFURT (AFP) - The European Central Bank will bite the bullet Thursday and cut interest rates to the lowest in its 10-year history as it tries to get the stricken eurozone economies back on their feet, analysts said.

The ECB's main rate now stands at 2.0 percent but analysts polled by Dow Jones Newswires expect a cut to 1.50 percent after bank governors meet here Thursday when they will also unveil fresh growth and inflation forecasts.

December central bank estimates were deemed obsolete almost on their release and the previous mid-point forecast of a 0.5 percent contraction this year will certainly be revised sharply lower.

"Cutting the main financing rate to 1.50 percent is therefore just a formality," said Bankhaus Lampe economist Alexander Krueger.

Eurozone Gross domestic product (GDP) shrank 1.5 percent in the last quarter of 2008 and economists expect it to be even weaker early this year in the 16-member group.

EU Monetary Affairs Commissioner Joaquin Almunia refused Tuesday to rule out further downgrades to the EU commission's own economic outlook owing to the impact of the economic crisis.

"When we presented the forecasts on January 19, I said the risks are broadly balanced," Almunia told the European Policy Centre think-tank in reference to a forecast 1.9 percent contraction in eurozone GDP.

"Now I can say downside risks are bigger," he continued, after manufacturing activity fell in February for the ninth month running.

Consumer confidence is falling across the eurozone, credit is tight and unemployment rose in January to 8.2 percent of the workforce, its highest level since September 2006.

Inflation has ticked up to 1.2 percent but remains well below the ECB's target of just under 2.0 percent and analysts say it will likely fall back again, probably dipping into negative territory around mid-year.

As a result, many feel the ECB will take its main lending rate down to 1.0 percent, which influential ECB governor Axel Weber, head of the German central bank, has said represents the lower limit.

Other economists see the ECB matching the US Federal Reserve in approving interest rates of essentially zero if the risk of deflation becomes a serious one.

In London, the Bank of England is expected to cut its main rate from 1.0 percent to fresh record low of 0.50 percent on Thursday.

The ECB has slashed its rate from 4.25 percent to 2.0 percent since October but the eurozone economy is still wallowing in its first recession.

For many eurozone members, the slump is the biggest since the 1930s Great Depression and the situation has grown worse now that many formerly dynamic economies in eastern Europe are also in dire straits.

Countries like Hungary and Poland have asked that time spent waiting to join the eurozone be shortened and the ECB could face tough choices if global economic activity slumps further.

It could begin to use unconventional measures known as quantitative easing -- essentially running money printing presses overtime -- to underpin activity.

The Fed and the Bank of England have bought assets such as commercial paper issued by businesses so as to pump cash into the system but that option is less clear-cut for the ECB.

The central bank cannot purchase government securities directly and buying on secondary markets "involve tricky negotiations over which government debt it should buy," Capital Economics economist Jennifer McKeown noted.