Expected rate cut may be last by ECB, says Ulster Bank
ECB: rate cuts expected (Photo by Ralph Orlowski/Getty Images)
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TODAY'S expected rate cut from the European Central Bank could be the last, economists at Ulster Bank say, because of the reluctance of some ECB governors to see rates go below 1pc.
But the ECB would be right not to follow the same "money-printing" measures as the US Federal Reserve and the Bank of England, because of the differences in the eurozone banking system, senior economist Simon Barry says.
"It is clear that there is a lively debate taking place within the ECB Governing Council on options on interest rates. We anticipate another 0.25pc rate reduction at the Thursday meeting, although this may well end up being the final interest rate cut, as a number of officials have been particularly vocal about not cutting below 1pc," the bank's 'Focus on Markets' says. Once it stops cutting interest rates, the ECB may be right to target increased support for the banking system, rather than injecting cash as in the US and UK, the report argues.
Eurozone bank loans to the private sector, and the use of capital markets by banks to secure funding, amounted to 145pc of GDP and 81pc of GDP respectively, but were 63pc and 168pc of GDP in the US.
"Thus, the unconventional policy measures that best suit the euro area are likely to differ from those in the US or other economies where a more market-based financial system prevails," Mr Barry says.
He suggests the ECB may decide to make a commitment to leaving rates at very low levels for some time into the future, which should provide a stimulus by helping to keep market interest rates low as well.
The report forecasts that recovery in the eurozone will again be dependant on a pick-up in world demand. "Our base case is that the eurozone will be lagging the other main economies, though growth should return and average around 0.4pc in 2010.
"Overall, we continue to look for a US recovery to begin later this year. The US and UK household sectors do need to continue their adjustment to a higher savings regime, however, and headwinds from the huge shock to the financial system will be with us for some time," the report says.
As a result, the recovery is unlikely to be particularly strong and will only be maintained if governments remain focused on implementing supporting policies in critical areas
"Ensuring that the banking system is adequately capitalised is a major priority. Achieving sustained economic recovery will require an improvement in the availability of credit," it says.
- Brendan Keenan
