Speculation mounts over ECB rate cut

SPECULATIONS of a cut in interest rates by the European Central Bank rose yesterday as the Swedish Central Bank cut rates 0.5% to 1.5%.

Sweden’s economic performance has been similar to the EU’s and the cut is seen as significant from an ECB perspective.

The possibility of an ECB rate cut was strongly denied last week by various member states, including Germany and Holland. However, Reuters have reported that the ECB was split down the middle on lowering rates.

That piece of information alone has set market speculation flying that the bank was, after all, taking a serious look at implementing a cut, despite vehement denials last week.

Central to the argument for a cut is the parlous state of the eurozone economy whose growth is lagging the US by a considerable amount.

And it follows, experts argue, that if a cut makes sense for the Swedes then it makes sense for the ECB as well.

Austin Hughes said last week when speculation first surfaced about a cut that there was no more than a one in three chance of it happening.

Despite the talk, any cut, if it should happen, will not take place before September at the earliest, he said.

Meanwhile a source said the bank was considering a rate cut.

But that will depend on how upcoming economic figures turn out.

The report also said the ECB’s governing council was split on whether a reduction was necessary.

It needs to be borne in mind also that ECB officials have so far ruled out an easing of monetary policy despite pressure from some politicians and economists.

The bank has held euro zone interest rates at 2% for more than two years.

Last week the ECB’s chief economist, Otmar Issing, raised the possibility of a cut in rates when he told journalists that the markets have always anticipated the ECB correctly.

That was in response to a question which asked if the markets view was correct when it started to speculate that the next move in ECB interest rates would be downwards.

However, other factors such as the loss in value of the euro are seen as significant at this stage.

A view exists that the ECB might regard a fall in the currency as having the same potential impact as cutting interest rates.

Also they might be concerned that lowering rates might send the wrong signals to international markets and the euro could weaken significantly.

Such a move would hit oil prices significantly and undermine the rate cut.

Mr Hughes believes the ECB will view its options very carefully before making that final leap.