Interest rates to stay low until next year
The European Central Bank (ECB) meets in Luxembourg today to discuss if it will make any changes to interest rates – which are now at a historic low.
It is one of two ECB governing council meetings held outside the bank’s Frankfurt headquarters each year.
Despite a danger of deflation and complaints of tighter credit, the eurozone’s main interest rate will probably stay at 1%.
Bank of Ireland chief economist Dan McLaughlin said the euro cash market is currently priced for the first move up by the ECB in March or April next year.
“Although one should remember that the world economy will have to look a lot better than it does now for these moves to materialise,” he said.
Like the ECB rate, central bank rates across the major economies are at extremely low levels.
Mr McLaughlin said interbank rates may have scope to fall further but official rates are now generally thought to be at a cyclical floor, which means that the next move will be up.
“Central Banks themselves seem to be in no rush to tighten monetary policy – or, in the current jargon, to pursue an ‘exit’ strategy – and the Federal Reserve reiterated at its June meeting that it expects to keep rates ‘at exceptionally low levels for an extended period’.
“Similarly the Bank of England sees significant risks to the economic outlook and is still printing money in order to stimulate activity, although the UK data has generally surprised to the upside of late, implying that a return to positive growth may be at hand.
“Closer to home, the ECB thinks rates are ‘appropriate’ now and recently injected cash into the money markets, at a rate of 1%, which is not the action of a bank set to tighten monetary policy any time soon,” he said.
JPMorgan also said the ECB are not likely to raise interest rates until at least 2011.
It said the ECB will likely start raising rates before the Fed, given euro-area inflation probably won’t fall as much as in the US, and because of the ECB’s “singular mandate” to right inflation.
ECB figures show growth of lending to the private sector slowed in May to 1.8% from the same month a year earlier, though on a monthly basis loans edged up following three months of declines.
Barclays Capital economist Thorsten Polleit said banks were trying to limit risks faced by lending to companies and private individuals.
ECB president Jean- Claude Trichet has urged commercial banks to lend more, and the message has been echoed by governing council members such as influential German central bank governor Axel Weber.
