independent

Saturday 19 April 2014

ECB in 'very serious' debate on cutting interest rates next year

Jens Weidmann, president of Bundesbank

THE European Central Bank may cut interest rates early next year if the eurozone economy does not pick up.

Policymakers reported that the bank had a "very serious" debate about a possible cut earlier this week.

The German and Austrian central banks separately suggested that a pick-up in the eurozone was unlikely and forecast scant growth in their respective economies in 2013.

The ECB kept interest rates on hold on Thursday, but members of the Governing Council held "a wide discussion" about cutting interest rates from their current record low of 0.75pc, according to both Reuters and Bloomberg.

Jozef Makuch, one of the council members and the governor of Slovakia's central bank, used the term "very serious" to describe the debate.

He said: "If the situation does not improve – and there is a relatively small chance there will be a significant improvement – it is possible to expect a move in interest rates next year."

The latest growth forecasts paint a gloomy picture.

The Bundesbank said it expected Germany's economy to grow by just 0.4pc next year – down from a June forecast of 1.6pc.

The new projection is marked by "a high degree of uncertainty", said the Bundesbank, adding: "The balance of risks is on the downside."

Austria's central bank cut its 2013 growth forecast for the country's export-dependent economy to 0.5pc from the 1.7pc it had expected in June, due to the global downturn, weak investment and sluggish consumer spending.

The downward revisions come a day after the ECB lowered its forecasts for next year, pointing to weaker growth prospects for the bloc's core countries, such as Germany, France and the Netherlands.

"Given the difficult economic situation in some euro-area countries and widespread uncertainty, economic growth will be lower than previously assumed," the Bundesbank said.

Outlook

It continued: "The cyclical outlook for the German economy has dimmed. Enterprises are cutting back their investment and hiring fewer new staff."

Germany has been a key driver of growth in the eurozone, which is now in its second recession since 2009.

But the country's resilience to the crisis is wearing thin and the central bank's new projections reflect this.

Germany could even enter a recession – defined as two consecutive quarters of negative growth.

The Bundesbank said: "There are even indications that economic activity may fall in the final quarter of 2012 and the first quarter of 2013."

The euro, which had dropped earlier in the day against the dollar after the growth forecasts were published, extended its fall after Mr Makuch's comments.

Economists expect that the German economy will contract in the fourth quarter but will then improve in the first quarter.

"The Bundesbank is quite negative about next year," said ABN Amro economist Aline Schuiling.

She added: "What we are currently seeing is more and more evidence that the global industrial cycle is bottoming out."

Irish Independent

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