Euro zone interest rates to drop to a new all-time low of 1 per cent
The European Central Bank (ECB) is expected to cut its base rate by another 50 per cent tomorrow, thus reaching a new record low in the history of the eurozone.
A month ago, as expected, the ECB’s Governing Council lowered its key policy interest rate by 50 basis points to a new low of 1.5 per cent at the Governing Council’s March meeting.
This will be the third interest rate cut since the beginning of the year, with a total decrease of 1.5 per cent in the bank’s key policy rate within in the space of four months.
Speaking during the post-meeting press conference on 5 March 2009, ECB President Jean-Claude Trichet left the door open to further cuts in view of the easing inflation rates for the eurozone.
“Overall, inflation rates have decreased significantly and are now expected to remain well below 2 per cent over 2009 and 2010,” Trichet said.
This outlook for inflation was due to the fall in commodity prices and diminishing domestic price and cost pressures, “reflecting the severe downturn in economic activity.
“Indeed, recent economic data releases and survey information add further evidence to our assessment that both global and euro area demand are likely to be very weak in 2009,” he added.
At the same time, Trichet explained how available indicators of inflation expectations over the medium to longer term remained “firmly anchored in line with the Governing Council’s aim of keeping inflation at rates of below, but close to, 2 per cent over the medium term.
“A cross-check with the outcome of the monetary analysis confirms that inflationary pressure has been diminishing,” the ECB President said.
In fact, the latest figures for the eurozone show that inflation rose to 1.2 per cent in February from 1.1 per cent in January, which had been the lowest in almost ten years.
This analysis has been confirmed by other analysts, with credit rating agency Moody’s also forecasting a 0.5 per cent interest rate cut tomorrow in view of decreasing inflation pressures.
“Easing pricing pressures and the downside risk to the bleak euro area economic outlook increase the chance that the ECB will undershoot its medium-term target of inflation of just below 2 per cent,” the credit rating agency said in a note circulated last Friday.
“As a result, we expect the central bank to lower rates by 50 basis points to 1 per cent in April,” Moody’s added.
63 of 78 economists in a Reuters poll published last Thursday said rates would be cut by 50 basis points to another new low of 1.0 per cent.
Six said a smaller 25 basis point cut was more likely, while nine said the Governing Council would leave them unchanged when it met tomorrow.
The Economic Cycle Research Institute said its Eurozone Future Inflation Gauge fell further in January, hinting at lower inflation rates in the coming months.
Money supply growth (M3), which the ECB considers as a leading indicator of price pressures, slowed in February to 5.9 per cent from 6.0 percent in January, but was above analyst expectations.
In March, inflation in three German States slowed to its lowest levels in at least a decade and pointed to a much lower than expected price rise for Germany as a whole. Annual inflation in Brandenburg, Hesse and North Rhine-Westphalia was between 0.2 per cent and 0.3 per cent.
On the other hand, United States (US) oil prices rose to close to US$ 54 per barrel last week, up 20 per cent since the end of February, and posted a second monthly gain in a row.
Weak economic growth suggests interest rate cut likely
Data so far has confirmed the ECB’s March assessment of continued weak economic activity in early 2009, although there were some positive signs.
For instance, the flash Euro zone Purchasing Managers Index (PMI) for the services sector rose to 40.1 in March, well below the 50 mark where growth begins but ahead of the 39.2 per cent registered the previous month.
Factories also saw a slowing in the rate of decline, with the flash PMI for the manufacturing sector rising to 34.0 in March from 33.5 in February.
Italian business morale fell to a record low in March, with economic research institute ISAE’s index falling to 59.8 from 63.2 in February.
Germany’s IFO business climate index fell to 82.1 in March from 82.6 the previous month, while French morale remained at a record low.
But Belgian business confidence, an indicator for the entire euro zone, recovered slightly in March.
Consumer sentiment also fell in various euro zone economies. GfK’s forecast of German consumer sentiment fell for April, ending a six-month run of consecutive rises.
French consumer morale also registered a reading of -43 for March, unchanged from February. Italian consumer morale dropped a lot more than expected to 99.8 in March from a revised 104 the previous month, taking it back to end-2008 levels after two months of gains.
Industrial new orders in the euro zone also shrank by over a third in January from a year earlier, the biggest ever such drop. Orders fell 3.4 per-cent month-on-month in January for a 34.1 per cent annual slump.
Unemployment in major Euro zone counties also increased in February, with France’s headline jobless total jumped in February to 2.4 million, while Germany came in at 3.5 million.
Euro zone unemployment stood at a 28-month high of 8.2 per cent in January.
Annual growth in loans to the private sector in the Eurozone slowed to 4.2 per cent in February from 5.0 per cent in January, falling short of analysts’ expectation of a 4.5 per cent rise.
Likewise, growth in household borrowing in the Euro area was just 0.7 per cent in February, the lowest since records began in 2003.
Moreover, the euro zone trade deficit was wider than expected in January as seasonally adjusted exports sank more than 10 per cent from the previous month.
The euro was trading at US$1.34 against the US dollar on Friday, down around 8.9 per cent from its mid-December peak. On the ECB’s preferred trade-weighted basis, the euro has increased in value by 3.5 per cent since the last rate meeting.
Money-market rates continued to ease given the 275 basis points of rate cuts and generous liquidity supplies from the ECB. Benchmark 3-month EURIBOR was at 1.531 per cent on Friday, an all-time low.