Borrowers to gain from expected further cut in interest rates to 1%

BORROWERS can expect the cost of borrowing in Europe to hit record lows tomorrow.

The European Central Bank is almost certain to cut interest rates by a 0.25% to 1% where they are expected to remain until well into 2010, Bloxham Stockbrokers said yesterday.

What other moves the bank makes in relation to “further unconventional policies” referred to after its April policy meeting is open to question.

With tomorrow’s cut expected to be the final one the broker said the “key” market focus will be on what additional action on funding and credit supply the ECB intends to do.

“At the very least, it looks set to extend the maturity of its loans to commercial banks,” it said.

It is on the cards that the ECB could outline a framework for “quantitative easing this week involving outright asset purchases even if it is not ready to take the plunge just yet”, it said.

In the current uncertain climate Bloxham said: “It is still possible that the ECB will cut official interest rates below 1% if it believes that the positive effects of lower official rates on the wider economy will offset any detrimental impact of a narrower spread on interbank lending.

“For now, though, we maintain the view that official rates will trough at 1%,” said the broker.

If the ECB was to lower its official rate below 1% that would narrow the gap between the cost of borrowing and he amount it pays for deposits to less than 1%.

When that happened last October it resulted in more money being placed on deposit that was normal.

With credit a major issue for industry Bloxham expects that the ECB, anxious to avoid further funds being diverted away form the commercial market, should make tomorrow’s cut the final one of this lowering cycle.

It still is possible the ECB would cut official interest rates below 1%, if it takes the view that the positive impact of lower official rates on the economy would outweigh any detrimental impact of a narrower spread on interbank lending.

Conflicting reports about how well the eurozone economy is doing could put further pressure on rates in the months ahead, analysts also said.

In a fresh report on the European economy the EU commission said despite some signs of recovery in the eurozone economies the region was destined to suffer as 4% decline in the current year.

The latest figure of 4% for this year compares with an earlier EU forecast of a 1.9% decline in 2009.