National Irish Bank predicts ECB interest rate cut of further 0.5%

THE ECB will cut interest rates afurther 0.5% in April but will not drop its benchmark rate below 1% this year, according to National Irish Bank, which yesterday published its Quarterly Economic Commentary for Spring 2009.

“The ECB will deliver a final 50bp rate cut in April, but will avoid going below 1.0% in 2009. ECB projects inflation at 1.0% in 2010, which gives them plenty of room for further cuts. The ECB has signalled that other options will be considered once the 1.0% interest rate is reached, and some form of quantitative easing may be applied,” said NIB’s chief economist Ronnie O’Toole.

Mr O’Toole said that on many measures, the level of economic activity is reducing sharply, most notably in unemployment, retail sales and government revenue.

“If the pace of deterioration of the Irish economy in the first three quarters of 2008 could have been characterised as surprising, the subsequent acceleration of the decline in Q4 and into Q1 of 2009 has been shocking,” he said.

Mr O’Toole expects consumer spending to contract a further 4.5% in 2009, compared with a decline of 0.5% in Europe as a whole.

“In 2009, many of the fears regarding the economic situation will crystallise into real difficulty for households. Unemployment is set to rise sharply, the income levy and mini-budget in April will reduce incomes and both public and private sector workers will have to contend with effective reductions in nominal pay. The one positive for 2009 is the rapid fall in interest rates, which has increased household purchasing power though, overall, the negatives will far outweigh any positives,” he said.

Mr O’Toole’s forecast on unemployment coincides with Finance Minister Brian Lenihan’s, with both expecting it to rise and to average 12% for 2009.

“One of the reasons for the rapid rise in unemployment is the absence of signs of significant emigration, with the population increasing up to the end of 2009 at around the pace of natural increase,” he said.

Mr O’Toole expects the US will move out of recession before Europe, as the massive stimulus package starts to kick in.