Markets bet on ECB rate cut in wake of EU summit deal

Agence France-Presse

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The European Central Bank will pare back interest rates at a meeting here Thursday to give a push to progress made by EU leaders in fighting the crisis at their summit last week

FRANKFURT, Germany – The European Central Bank will pare back interest rates at a meeting here Thursday to give a push to progress made by EU leaders in fighting the crisis at their summit last week, analysts predicted.

The ECB, convening for its regular monthly policy meeting, will trim eurozone borrowing costs by a quarter of a percentage point to a new record low of 0.75%, central bank watchers predicted.

Doing so will help shore up the relatively positive sentiment on financial markets since the summit, they argued.

“The ECB has the chance to calm financial markets at least for a few months if it complements the summit decisions with a serious effort to stimulate the economy,” said Berenberg Bank economist Christian Schulz.

“We expect the ECB to cut its main interest rate by 25 basis points to 0.75%,” Schulz said.

The central bank has held interest rates in the 17 countries that share the debt-wracked euro at an all-time low of 1% since December after reversing last year’s rate hikes.

Other anti-crisis measures include a hotly contested programme of indirectly buying up the bonds of debt-mired countries; an injection of more than 1.0 trillion euros ($1.26 trillion) into the banking system to avert a dangerous credit squeeze; and the relaxation of criteria for collateral that banks need to put up to take out loans from the central bank.

Nevertheless, ECB officials have never ceased to repeat throughout that such measures are merely meant to buy time for governments to tackle the root causes of the crisis — profligate spending.

At last week’s summit, EU leaders finally appeared to make some progress by agreeing a growth pact to breathe life into Europe’s flagging economies and mapping out a decade-long timeline for tighter union, including a single banking union.

Nevertheless, while they took “the next steps towards more integration,” the deal “fell short on details,” cautioned ING Belgium economist Carsten Brzeski, who saw “enough scope for more monetary stimulus.”

Indeed, a quarter-point cut was more or less a done deal and had been “pre-announced by several governing council members in recent days,” he argued.

At the same time, analysts were divided whether the ECB would announce additional anti-crisis measures, such as the resumption of its bond-buying programme which has lain dormant for 16 weeks.

A rate cut on its own “would probably disappoint markets,” said Schulz at Berenberg Bank, suggesting the ECB could also announce a new very long-term refinancing operation (LTRO).

But Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast (EEF), was not so sure.

“We do not expect the ECB to announce a new LTRO tomorrow. More liquidity could be needed should tensions in the banking sector escalate again but at the moment, there is no strong evidence that a Eurozone-wide lack of liquidity is an issue,” she said.

Neither was she expecting any announcement regarding bond purchases, the analyst continued.

With the ESM bailout fund explicitly tasked to buy bonds of peripheral countries, the ECB will probably leave its SMP bond-buying programme dormant.

“However, we think that the programme would need to be revived in severe downside scenarios,” Diron said. – Agence France-Presse

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