ECB unlikely to lower rates: economist
(01-08 18:17)
Despite low inflation, recession and high unemployment, the European Central Bank is unlikely to cut rates or offer fresh stimulus this month, an economist said today.
"A rate cut or any other action by the ECB on Thursday would come as a surprise to us," said Christian Schulz, a senior economist with Berenberg Bank of Germany, Xinhua reports.
The economy of the eurozone contracted by 0.1 percent during the third quarter in 2012, making a recession, which is defined as two successive quarters of negative growth. The eurozone economy dropped by 0.2 percent in the second quarter of 2012.
According to Schulz, discussions about further monetary stimulus will continue as long as the recession lasts. "The ECB is likely to leave the door open to further action if the economy disappoints its quite pessimistic projection of a 0.3 percent contraction in 2013," said Schulz in a note.
However, additional stimulus would trigger controversy that would be dangerous for the credibility of ECB's most important tool, Outright Monetary Transactions, under which the ECB promised to buy unlimited bonds to help bring down the borrowing costs of eurozone governments.
Schulz saw widespread opposition to additional stimulus at the ECB. In recent comments, key Executive Board members of the ECB stated their reluctance to use any new measures, according to Schulz.
The ECB is unlikely to cut rates for several reasons, said Schulz. The ECB President Mario Draghi has to keep as many Governing Council members on his side as possible to ensure the largest possible majority if the OMT needs to be deployed.
The economic confidence is recovering and the eurozone may exit recession ahead of the ECB's forecasts. The healing banking system will potentially drive down borrowing costs more than a rate cut.
"A cut in the main rate could imply a negative deposit rate or alternatively a smaller spread between deposit and main rates," he said and added that a lower spread would diminish the incentive for banks to lend to each other, while negative deposit rates would be unchartered territory and thus a very last resort.
"Leaving the door open to more action is important to reassure markets that the ECB remains ready to act if necessary," he said.
The ECB is scheduled to hold the first monetary policy meeting in 2013 on Thursday.
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