Friday, December 12, 2008

ECB Signals Reluctance to Cut Rates Much Further, May Pause

By Gabi Thesing

Dec. 12 (Bloomberg) -- European Central Bank policy makers signaled they’re reluctant to cut the benchmark interest rate much further after three reductions to 2.5 percent since October, and may not trim borrowing costs again next month.

“We have dealt with the economy to some extent because we took an extraordinary measure,” ECB council member Yves Mersch said in Luxembourg today. His colleague Axel Weber said last night he “would like to avoid” taking the rate below 2 percent. Both questioned whether the bank will have enough new information in January to act again on rates.

The ECB has lowered borrowing costs by an unprecedented 1.75 percentage points since the global financial crisis pushed the euro region into recession. European industrial production plunged the most in 15 years in October as orders weakened and the region’s biggest companies scaled back investment, the European Union statistics office in Luxembourg said today.

Investors are betting the deepening economic slump will force the ECB to slice another 50 basis points off the benchmark rate in January, Eonia forward contracts show.

“They will be forced to go to 1 percent or lower by June,” said Juergen Michels chief euro-area economist at Citigroup Inc in London. “The rhetoric at the moment is to justify their forecasts, which are too optimistic.”

The ECB predicted last week that the economy will contract about 0.5 percent next year before recovering to expand around 1 percent in 2010. Economists at UniCredit Group estimate gross domestic product will drop 1.3 percent next year.

Behind The Curve?

French manufacturing confidence fell to a 21-year low in November, suggesting the region’s second-largest economy will suffer a bigger contraction in the fourth quarter than previously anticipated, the Bank of France said today.

“The ECB should refrain from considering any pause in the easing cycle to avoid falling again behind the curve,” said Marco Valli, an economist at UniCredit in Milan.

Mersch said there may “not be considerable and significant information available before February, March.”

The euro rose more than half a cent to $1.3389 after the remarks as evidence mounts that some ECB policy makers are reluctant to continue easing monetary policy aggressively.

The bank last week lowered the key rate by 75 basis points, the biggest reduction in its ten-year history.

ECB Executive Board member Juergen Stark said on Dec. 10 that scope for further rate cuts is “very limited, potentially allowing for small steps only.”

While Weber and Mersch said the ECB still has “room to maneuver” on rates, Weber added: “We should be cautious when our rates approach territory we haven’t explored before. Our lowest level so far was 2 percent.”

Investors are betting the Federal Reserve will halve its benchmark rate to 0.5 percent at its Dec. 15-16 policy meeting. The Swiss National Bank made the same shift yesterday.

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