ECB rate cut likely before end of year
The ECB is meeting on Thursday week to discuss the possibility of a rate cut as tensions rise in Europe amid the economic downturn.
However, given that next week’s meeting will be the last for current president, Jean-Claude Trichet, commentators expect the bank to keep rates on hold at 1.5%, but they are not ruling out a cut in the coming months.
A 0.25% cut would mean that a person with a €100,000 mortgage would see monthly repayments reduce by €15.
Mr Trichet’s ending of his eight-year term as head of the ECB is understood to be a major factor in the bank’s decision on rates next month. Reversing the interest rate increases could be seen as an admission that he made a big mistake when starting to raise rates, some say. The ECB raised its key rate twice this year to 1.5%.
Yesterday a eurozone central bank official said that interest rate cuts are likely to be discussed next week but they are not on the current agenda. The official indicated the ECB is more likely to try non-standard measures first before resorting to rate cuts.
He said ECB policymakers are also likely to debate restarting their covered-bond purchases along with further measures to ease monetary conditions. The reintroduction of 12-month loans to banks will also be discussed.
Governor of the Central Bank of Luxembourg, Yves Mersch, said talk of an interest rate cut is “wild”, but rate cuts could be considered if the economic situation worsened considerably from current expectations.
Meanwhile, a bigger fiscal adjustment is likely next year following news that Finance Minister Michael Noonan thinks Ireland is more likely to post gross domestic product (GDP) growth of around 2% in 2012 than the current official 2.5% forecast.
“I don’t think we’ll make 2.5% in the present circumstances,” he told the Wall Street Journal, adding that a recent think-tank estimate of 2% growth for 2012 was more realistic.
Mr Noonan said he would likely have to go above a planned fiscal adjustment of €3.6 billion to ensure next year’s budget deficit is reduced to 8.6% of GDP.
Earlier this month, the ECB’s departing chief economist, Juergen Stark, said Ireland should be more ambitious in cutting the public deficit as a percentage of GDP.
Mr Stark became the first of the bank’s top policymakers to suggest the eurozone could fall back into recession and Irish Central Bank governor Patrick Honohan backed up the gloom in a Reuters interview, pointing to the sharp slide in growth.
