ECB gearing up for swift round of loan-rate cuts
Central bank extends reach as ‘lender of last resort’ for all crisis-hit EU nations
President Trichet has pushed the central bank's reach into the euro region's neighbouring economies. Photo: PHILIPPE DESMAZES/AFP/Getty Images
Tuesday November 04 2008
Jean-Claude Trichet is extending the European Central Bank's (ECB) powers just as it gears up for what may be the fastest round of interest-rate cuts in its 10-year history.
President Trichet has pushed the central bank's reach into the euro region's neighbouring economies as they struggle to cope with the financial crisis, and has approved record lending to banks. Economists predict the ECB will slash its benchmark rate, currently at 3.75pc, to 2.5pc by April after a likely cut on Thursday.
"The ECB is at times playing the role of lender of last resort for the whole European financial system,'' said Guillaume Menuet, a senior European economist at Merrill Lynch in London. "Its mandate is being implicitly expanded.''
While Trichet's remit applies just to the 15-nation euro region, the absence of an institution charged with financial stability across the 27-member European Union created a vacuum the ECB is trying to fill. In the past three weeks alone, it gave a €5bn loan to Hungary, set up currency swaps with Denmark and Switzerland and increased its lending to euro-region banks to more than $1tn.
The Hungarian, Polish and Czech stock indexes all fell more than 24pc last month.
Economists expect more rate cuts from the ECB as it tries to cushion an economy hurtling toward a recession. The European Commission today called for "co-ordinated action'' by policy makers to support the economy as a report showed manufacturing contracted at a record pace last month.
The central bank will probably cut its key rate by a half point this week, taking it to 3.25pc, according to the median of 50 forecasts in a Bloomberg News survey. It will deliver another 75 basis points of easing in the following five months.
Confidence
Consumer and executive confidence in the euro region's economic outlook plunged by the most since at least 1985 in October, the European Commission said last week.
"The ECB is only too well aware that extended, deep recession is now the major danger facing the eurozone economies,'' said Howard Archer, chief European economist at IHS Global Insight in London.
The Bank of England will probably also cut its benchmark by 50 basis points, taking it to 4pc, according to a separate survey.
Trichet and other policy-makers are still trying to ease strains in financial markets that are crippling the global economy. Europe's corporate debt markets endured their worst month on record in October and the gap between the yields on 10- year German and Italian government bonds widened to 1.27pc, the most since 1997. (Bloomberg)
