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ECB rate cut to counter inflation
There is consensus amongeconomic commentators that the European Central Bank is set to cut its rate by 0.25% tomorrow, in an effort to keep inflation in check.
By Vincent Ryan
European stock indices have been trading strongly on the expectation that the ECB will pump a monetary stimulus into the economy. The Irish Stock Exchange recorded its strongest June since 2005. The ISEQ gained 2.3% following losses in April and May.
Davy economist Conall MacCoille said a number of issues came together to cut the ECB’s lending rate to a historic low of 0.75%.
“Mounting speculation about a 0.25% rate cut has followed the weak short- term indicators on the health of the euro area economy. And comments from ECB Governing Council members Ewald Nowotny and Benoit Coeure have hinted at a rate cut this month.
“Markets are also conscious that over the past year, the ECB has followed up political progress — like agreeing bailout terms for Greece and treaty commitments on fiscal discipline — with additional action to calm bond markets,” said Mr MacCoille.
The ECB has never cut its main refinancing rate below 1% but policymakers say there is nothing to stop them doing so and they may want to bolster eurozone leaders.
At last week’s summit, ECB president Mario Draghi declared his satisfaction with the agreement to speed up cross-border banking supervision and allow the eurozone rescue fund to recapitalise banks directly thereafter.
“I think Draghi saying that he is happy with the summit results is a strong sign that the ECB is ready to do something,” said Christian Schulz at Berenberg Bank, forecasting a quarter- point cut.
But Schulz, a former ECB economist, added: “We think if it’s just a rate cut, that would be a disappointment for markets because a rate cut would not do very much at all for the peripheral economies... that’s why something else is needed.”
However, Mr MacCoille pointed out that the effective ECB lending rate to banks was already around the 0.3% level due to the overnight lending rate.
“However, the excess liquidity in the euro area banking system has pushed overnight borrowing rates to close to 0.2%, well below the ECB’s main refinancing rate of 1%.
“So a cut in the main refinancing rate may now be largely superficial, with little impact on the overnight cost of funding for European banks,” he said.
The ECB’s rate cut would benefit Irish tracker mortgage holders. Ireland has almost 400,000 mortgage holders on contracts linked to the ECB’s lending rate. They will gain €300 a year from the ECB’s moves to battle inflation.
Additional reporting: Reuters