ECB to resist calls to lower interest rates, economists’ poll shows

THE European Central Bank will probably resist growing calls for it to slash interest rates next week, although a stalled eurozone economy will force the bank to cut them early next year, a Reuters poll showed.

The escalating debt crisis and new signs that the economy has taken a turn for the worse has prompted some major banks, including JPMorgan, RBS and Credit Agricole, to make high-profile predictions for a rate cut next month.

“The case for a rate cut at the first scheduled opportunity continues to build,” said Ken Wattrett, economist at BNP Paribas, who expects a 25 basis point move next week. “The threat of an adverse feedback loop between the financial sector and the economy requires a circuit breaker — and as soon as possible.”

There were 32 economists forecasting an interest rate cut by the end of this year, compared with none in the previous six monthly polls.

Money markets have priced in a quarter-point move next month but there are substantial barriers to the bank doing so, not least that the meeting would conclude ECB president Jean-Claude Trichet’s term of office with a dramatic U-turn.

Only 20 of the survey’s 76 economists expected a rate cut next week, with a median 70% chance the ECB will hold rates at 1.5%.

Seven said the ECB would cut rate 50 basis points just four months after it last raised them, while 13 said they would opt for a more modest 25 basis point cut.

“A rate cut cannot be ruled out but we suspect the ECB will wait until the updated (staff) projections are ready in December before making such a bold move that — at the current juncture — could be seen as a ‘panic’ reaction,” said Annalisa Piazza, economist at Newedge.

The majority said the ECB would probably pump more liquidity into the market before slashing rates, as well waiting for headline inflation to fall back to target by December or January.

Italy’s Mario Draghi replaces Trichet — who raised rates as the financial crisis was gathering pace in 2008 — from November and it would also be a bold move for him to begin by easing the bank’s policy stance.

“Tactically, a cut now would still be on Trichet’s watch and relieve new president Mario Draghi of announcing or pre-announcing a cut at his first press conference,” said Christian Schulz, economist at Berenberg Bank.

Trichet last month gave an impassioned defence of the ECB’s track record of keeping inflation low in the eurozone, despite the severe economic difficulties that dog the 17-nation bloc’s peripheral countries.