News | Wednesday, 04 March 2009

ECB expected to lower interest rates to an all-time low of 1.5 per cent

Charlot Zahra

After keeping its key interest rate on hold in February at a historical low of 2 per cent, the European Central Bank (ECB) is widely expected to chop off another 50 basis points in tomorrow’s meeting in Frankfurt.
In announcing the ECB council decision on 5 February 2009, ECB President Jean-Claude Trichet explained that as anticipated in its interest rate decision of 15 January 2009, “the latest economic data and survey information confirm that the euro area and its major trading partners are undergoing an extended period of significant economic downturn, and that accordingly both external and domestic inflationary pressures are diminishing.
“We continue to expect inflation rates in the euro area to be in line with price stability over the policy-relevant medium-term horizon, thereby supporting the purchasing power of euro area households,” he added.
However, annual inflation has eased well below the bank’s medium term target of 2 per cent.
Indeed, euro area inflation has fallen to 1.1 per cent as the global economic slump contributed to a collapse in oil prices, taking it well below the ECB’s target of just below 2 per cent.
“High frequency data indicate the euro zone is likely to contract sharply in the first quarter of 2009, after GDP fell by 1.5 per cent on a quarterly basis in the final three months of last year. This will add pressure on the ECB to cut rates in March,” credit rating agency Moody’s said in a note issued on Friday.
Since last October, the ECB had cut its base rate by a total of 2.25 per cent in a series of consecutive cuts.
Inflation could hit rock bottom this year and some analysts expect a quick dip into deflationary territory, but most agree the central bank will not follow US and Japanese counterparts by assuming a so-called zero interest rate policy, or ZIRP.
On the same day, the Bank of England (BOE) was also scheduled to take its monthly monetary policy decision, and was expected to shave off another 50 basis points during its monthly meeting, taking the BOE’s interest rate to a fresh low of 0.5 per cent.
The BOE’s Monetary Policy Committee lowered its key repo rate by another 50 basis points at its February meeting, taking the monetary policy rate to a fresh record low of 1 per cent.
Since the central bank began its aggressive monetary easing campaign in early October, the key repo rate has been cut by a massive 400 basis points.
Another 50 basis point rate cut was expected at the March meeting, but with the monetary policy rate rapidly approaching the zero bound, “Britain’s central bankers are running out of room to cut rates much further.
“The next step for Britain’s central bankers will likely be to adopt a quantitative easing policy, creating central bank money to boost money supply,” the note circulated by Moody’s on Friday warned.



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04 March 2009

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