Nov 5, 2008 |
FRANKFURT - THE European Central Bank should cut its main lending rate sharply on Thursday to boost a slumping eurozone economy, and more reductions are waiting in the wings, analysts say.
The vast majority of 47 analysts polled by Dow Jones Newswires said the ECB would cut its benchmark rate by a half percentage point to 3.25 per cent, and most see it falling much lower by mid 2009.
ECB president Jean-Claude Trichet dropped a broad hint last week when he said it was 'possible' that policymakers would agree to a second cut a month after the ECB, the US Federal Reserve and five other central banks lowered rates in an exceptional coordinated action to boost financial markets.
EU finance ministers were hoping for a rate cut, French Finance Minister Christine Lagarde said on Tuesday after chairing a meeting with EU counterparts.
'We are holding our breath', said Mrs Lagarde.
The European Commission has warned that the worst financial crisis for generations has pushed the 15-nation eurozone economy into its first technical recession - two successive quarters of economic contraction - since the bloc was formed in 1999.
'We were badly mistaken with the different sequences of this crisis,' the head of the Eurogroup of nations, Luxembourg Prime Minister Jean-Claude Juncker, told European Parliament members on Tuesday.
The EU commission now forecasts eurozone growth of just 0.1 per cent in 2009, following an expansion of 1.2 per cent this year.
Unemployment was also expected to begin rising again next year.
Meanwhile, stock markets were slammed in October during one of their worst months on record, as investors sought to convert whatever they could into cash.
'With the economic outlook deteriorating rapidly, the ECB looks set to cut interest rates aggressively over the coming months,' Capital Economics economist Ben May said.
The financial crisis and global economic slowdown have also triggered a plunge in oil prices, which stood near a 21-month low point under US$59 (S$86.6) a barrel in London trade on Tuesday, well off their high of US$147 in July.
That trend has eased pressure on inflation, which hit a record 4.0 per cent the same month.
Inflation is now around 3.2 per cent, and should soon fall further towards the ECB's medium-term target of just below 2.0 per cent.
Rising unemployment should reduce the chances of higher wage demands fueling a second round of inflation of which the ECB has repeatedly warned.
Against that background, 'we look for the ECB to reduce rates by 50 basis points (a half percentage point) at its November meeting, and to follow up with a further 50 bp cut no later than January', Bank of America senior economist Holger Schmieding said.
Central banks have already begun to slash lending rates, with the Fed now at a record low of 1.0 per cent and the Bank of Japan at just 0.3 per cent.
In London, the Bank of England is tipped to cut its rate of 4.50 per cent on Thursday by at least half a percentage point, with Citbank saying it could go for a full point, though the BoE has never exceeded a half-point change in the past.
The euro now trades for around 1.27 US dollars, well off its record high above 1.60 dollars in mid July, though the drop has yet to benefit eurozone exporters owing to weaker global activity.
Mr Trichet was also expected to outline a forthcoming bank lending survey likely to show that credit conditions were set to tighten further.
Lending has become more restrictive despite central bank decisions to pump huge amounts of the world's major currencies repeatedly into money markets.
The question now is how far the ECB might go in what is shaping up as a cycle of major rate reductions.
Ms Jennifer McKeown at Capital Economics staked out the low lands with her forecast that rates would 'fall all the way to 1.5 per cent next year,' while most others were expecting the bank to go to 2.0 per cent, its current all-time low that stretched from June 2003 to December 2005. -- AFP
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Nov 5, 2008 |
LONDON - THE Bank of England (BOE) is widely expected to cut its key lending rate by at least half a percentage point on Thursday as recession looms in Britain amid a global financial crisis, analysts said.
Some economists are even forecasting the BOE to follow up last month's emergency half-point reduction to 4.50 per cent with a cut of one percent this time around.
Since the central bank's Monetary Policy Committee won independence from the government in 1997, it has never reduced British borrowing costs by more than 50 basis points.
'It is a virtual certainty that the MPC will cut rates by at least 50 basis points at the upcoming policy meeting,' said Mr Michael Saunders, head of European economics at Citi bank in London.
'The only real debate is how much they will ease: 50 basis points, 75bp or 100bp. The outcome is uncertain, but on balance we expect it to cut by 100bp,' added Mr Saunders.
The half-point cut on October 8, part of coordinated emergency action by central banks worldwide, was Britain's biggest interest-rate reduction for seven years.
'The (independent) MPC has never cut by more than 50bp. However, as the MPC acknowledges, the economic and financial crisis is unusually severe,' Mr Saunders said ahead of Thursday's meeting.
'Households are retrenching sharply and corporate liquidity is worsening sharply - a precursor to further marked cutbacks in jobs and investment,' added the economist.
The European Central Bank (ECB) is also set to cut its main lending rate sharply at a meeting on Thursday as inflation is falling fast in the eurozone.
Economists' consensus is for a cut of half a percentage point to 3.25 per cent.
Late last month, the US Federal Reserve slashed its key lending rate by a half point to match a historic low of 1.0 per cent.
The cut followed the Fed's emergency half-point reduction on October 8 coordinated with other central banks, including the BOE and ECB, to help fight a worldwide credit crunch.
In recent days and weeks, the central banks of Australia, China, Hong Kong, India, Japan, Kuwait, Norway and Taiwan have joined the wave of global interest rate cuts.
However the Danish central bank raised its key interest rate by 50 basis points to 5.50 per cent in late October to support the krone which has taken a beating amid the financial crisis.
'We see nothing standing in the way of the MPC (again) easing rates aggressively' on Thursday, said Investec analyst David Page.
'There is little to suggest the UK is moving out of its credit crunch yet. The economy is facing a deep recession,' he added.
Mr Page also noted that Britain's 12-month inflation rate was set to tumble from its current 16-year high level of 5.2 per cent in the coming months as the cost of oil and other raw materials falls, allowing the BOE to embark on a series of rate cuts.
The British economy is meanwhile on the verge of a recession after contracting for the first time since 1992 in the three months to September, according to recent official data.
Britain is not officially in recession until it reports two successive quarters of negative economic growth. Its economy shrank by 0.5 per cent in the third quarter of 2008.
'The question is not will the Bank of England cut interest rates Thursday, rather how big will the cut be?' asked Mr Howard Archer of IHS Global Insight.
'We expect the Bank of England to match the 50 basis point cut it made on 8 October, thereby taking interest rates down from 4.50 per cent to 4.00 percent'.
'However, given the very serious and still growing danger that the economy could suffer extended, deep recession, we believe that there is a compelling case for the Bank of England to... deliver a full one percentage point cut to 3.50 per cent', added Mr Archer. -- AFP
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