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''men '' ziet een ecb rate van 2,5% midden 2009
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ECB signals further interest rate reductions
By Ralph Atkins in Frankfurt
Published: October 23 2008 23:31 | Last updated: October 23 2008 23:31
Signs are emerging that the European Central Bank will soon cut eurozone interest rates again, as plummeting growth prospects and tumbling inflation clear the way for a sustained loosening of monetary policy.
Little more than two weeks after it slashed its main policy rate by half a percentage point to 3.75 per cent as part of co-ordinated global central bank action, policymakers at the notoriously inflation-sensitive ECB are making bolder signals that further reductions are possible.
Evidence of slower growth and falling price pressures was “a new element of our analysis”, José Manuel González-Páramo, an ECB executive board member, told an Irish newspaper on Thursday. The ECB could “diminish rates without adding to inflationary risks in the medium term”, he said.
With Sweden’s Riksbank slashing its main rate by a half percentage point on Thursday, and the Bank of England and US Federal Reserve also expected to lower borrowing costs in coming weeks, financial markets see a greater than 50 per cent chance of a half percentage point cut at the ECB’s November 6 interest rate setting. So far, Jean-Claude Trichet, president, has not acted to correct such expectations, although he could if he felt markets were misjudging the bank’s likely actions.
Additional cuts could follow swiftly, said Gilles Moec, European economist at Bank of America, as the ECB tries to avoid undershooting its inflation target. Financial markets have priced in ECB interest rates of just 2.5 per cent next June. But they would not fall as low as the 2 per cent reached in 2003, Mr Moec said. “You cut fast, but you don’t want to go too low because you don’t want to fuel the next bubble.”
As it cuts, however, the ECB is certain to maintain its focus on inflation. The pattern of the bank’s last easing cycle, which started in mid-2001, suggests the interest rate path will prove symmetric: just as the ECB pushed rates higher whenever necessary to combat inflation, rates will be lowered whenever possible.
However, arguments that borrowing costs have to be slashed to head off economic catastrophe are likely to be shunned. By instinct, the ECB is wary of being trapped by academic concepts; it believed the recent debate about moral hazard when the public sector bails out private banks was too theoretical.
Thanks to lower oil prices, the ECB, like other forecasters, probably sees eurozone inflation falling from 3.6 per cent to within its target of an annual rate “below but close” to 2 per cent sometime next year.
Crucially for the ECB the expectations of markets and others about future inflation rates are already firmly under control. Quarterly growth rates are likely to be around zero for the next few quarters, with a distinct possibility of a technical recession, or two quarters of contracting growth. Wage and other cost pressures should fall as a result.
Still, the ECB has not signalled the “all clear” on inflation. A return to higher oil prices, and high wage settlements, for instance in German industry, remain risks. The bank will watch carefully the impact on public finances of looming recessions and government bank rescue plans. Inflationary fiscal profligacy would strengthen the case for not racing ahead with monetary loosening.
Ben Bernanke, chairman of the Federal Reserve, has signalled his support for a US fiscal stimulus. In the eurozone, public finances vary between countries, making it harder for the ECB to offer blanket advice.