We should pray next rate move is upwards

THOSE hoping for another cut in ECB rates after Thursday’s historic move to 1% will probably be disappointed.

The ECB kept its options open on Thursday when ECB president Jean-Claude Trichet said the bank would cut again towards the end of the year if the economic circumstances demanded.

Should that happen it will be yet another sign that the eurozone economy is worse than anyone imagined.

Earlier this moth the EU downgraded its forecast for the region, saying it would contract 4% this year, instead of 1.95% as previously forecast.

The EU downgrade blamed a worse-than-expected recession that has driven unemployment to levels not seen since WWII.

Those revised contraction estimates for the European economy marked a dramatic downgrade of the European economic outlook.

“The European economy is in the midst of its deepest and most widespread recession in the post-war era” EU Economic and Monetary Affairs Commissioner Joaquin Almunia said in a summary of the latest data.

More to the point, on the day the report was issued, the chairman of the eurozone finance ministers, Jean-Claude Juncker, warned the economic and financial crisis risked exploding into a full blown “social crisis” if politicians failed to respond to surging unemployment.

“We are in the heart of an economic and financial crisis and we are heading towards a social crisis”, said Juncker after chairing a regular monthly meeting of eurozone finance ministers in Brussels.

Those remarks are a sobering counter point to the excitement about interest rates, already at historic lows, being cut again before the year end.

If we are serious about the economic situation improving as quickly as possible we should all be praying the next move in ECB rates will be up.

In reality, any further loosening of ECB interest rate policy would not augur well for us or for Europe.

Just weeks ago we saw a sharp revision of the outlook for Germany, now expected to fall by 5.6% this year, way below earlier estimates.

Hopefully things will not get worse and force the ECB to cut rates again towards the end of the year.

That scenario will be very bad news for all, because it means the recovery process will take longer and Ireland will struggle for longer to get back to growth and fresh job creation.

The most positive element of the forecast downgrade for Europe last week is that the worsening slump should keep inflation slow and that interest rates will certainly stay low into next year, in the current circumstances.

The ECB, always close to manic about protecting the inflation outlook, will not need to take drastic action on the basis of the most recent forecasts.

The probability is that over the next nine to 15 months rates in the euro area will stay at current levels.

The depth of recession in Ireland – expected to see output fall by more that 9%, over double the EU rate in 2009 – was manifest in last week’s credit figures showing private sector credit declined by nearly €4 billion in the year to March, more than offsetting the increases of the previous two months.

In the case of mortgages, the net increase in lending for the first quarter was €428 million against €2.6bn for the same period the year before.

Those figures make it clear where the housing market is at this stage and underpin also the stark reality that low interest rates are having no material impact on mortgage demand at this point in the crisis that is threatening to destroy what has been gained over the past 15 years.

It’s a time for keeping our heads and for measured comments about what’s going on.

After Thursday’s interest rate cut by the ECB, the employer lobby group ISME accused Ulster Bank and National Irish Bank of failing to pass on the full rate cuts to their business customers.

In the rate cut reaction, ISME boss Mark Fielding accused NIB of increasing its rate to the SME sector to 9.75%, up from 9.25% in April.

It was a “blatant example of gouging of their SME customers” by the banks.

While both may be guilty of not passing on the cuts in full, NIB yesterday said it had not increased rates as alleged by Mr Fielding.

Glad to set the record straight.