Market unlikely to get what it wants from ECB
Expectations of another cut in the European Central Bank’s record low rate are high; but they are unlikely to be fulfilled
Some market watchers say the central bank should cut the rate because of the string of bad data released recently and because, at its last meeting, there was talk by some members of the Governing Council about a reduction of the 0.75% refinancing rate.
The ECB reported an appalling contraction of credit for November and it faces a crash in the growth rate of money and contracting gross domestic product, Carl Weinberg, chief economist at data analysis firm High Frequency Economics, said.
Besides, industrial output is crashing, the eurozone banking sector is undercapitalized and unemployment is at a record high, he added.
We think the ECB cannot turn a blind eye to these circumstances, Weinberg wrote in a market note. We think it has to do something.
Since QE is not in its toolkit, we predict a rate cut, if only as a token measure of support for credit demand and economic growth. We think this rate cut could come at this weeks meeting.
Weinberg said the rise in eurozone unemployment to a record high of 11.8%, and especially Spains unemployment rate of 26.6%, were appalling, pointing out that rising unemployment is a lagging indicator of economic contraction.
Together, these statistics tell us that economic output has been contracting and continues to shrink at an ever-faster pace. In our view, record unemployment is one hallmark of an economic depression, he said.
WHY IT WONT CUT
But other analysts say the clouds are beginning to scatter and the ECB will most likely stand pat.
James Nixon, an economist with Societe Generale, said that Thursdays meeting was likely to prove a particularly close call.
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So the existing policy is working, he said. It is hard to see what more could be gained from a blanket cut in interest rates relative to the improvement in the monetary transmission mechanism that the ECBs policy is facilitating.
Economists at Danske Bank agree that the market should expect no new measures from the ECB this month despite the easing bias, but say that there is one circumstance in which the bank could ease monetary conditions further: if banks in the eurozone begin paying back substantial amounts of the cheap money they borrowed in December 2011.
That was the first of the two 3-year Long-Term Refinancing Operations (LTROs) launched by the ECB to ease the credit crunch and restore confidence at the height of the eurozone debt crisis, and the first date for repaying the funds early is January 30.
Excess liquidity is currently around 600 billion euros ($786 billion). If it drops sharply, the ECB could counter this with further easing in February or March, the Danske Bank economists said.