ECB leaves door open for 2013 cut

The ECB pondered an interest rate cut yesterday and predicted the eurozone economy would shrink again in 2013, leaving the door open to a possible reduction in borrowing costs early next year.

ECB president Mario Draghi said the policymaking governing council held a wide discussion on interest rates before opting to leave them on hold. The euro fell against the dollar and the yen in response.

The council also touched on the idea of cutting its deposit rate into negative territory. By effectively charging banks for deposits rather than paying them interest, the ECB could push banks to put their money to work elsewhere.

“There was a wide discussion... but the consensus was to leave the rates unchanged,” Mr Draghi said, a hint that opinions differed about what course to take. When there is unanimity, he generally says so.

The ECB left its main interest rate at a record low 0.75% for the fifth month running, despite new forecasts suggesting the eurozone economy will contract next year as it has this. It left the deposit rate at zero.

On the idea of negative deposit rates, Mr Draghi said: “We briefly touched upon the complexities that such a measure would involve and possible unintended consequences.”

The bank’s projections put GDP in a range of falling by 0.9% to growing by just 0.3% next year, suggesting contraction is more likely. In September, the ECB’s staff had pencilled in a significantly higher range of -0.4 to +1.4% for the eurozone.

“The somewhat downbeat ECB forecasts, the sombre tone of the ECB statement and Draghi’s admission that the ECB had a ‘wide discussion’ over many issues including a potential rate cut also keep the door open for a cut in early 2013,” said Berenberg Bank economist Holger Schmieding.

The decision to leave the main interest rate unchanged is in line with economists’ expectations in a Reuters poll, which also showed opinion was evenly split over the chances of a cut early next year.

“Later in 2013, economic activity should gradually recover, as global demand strengthens and our accommodative monetary policy stance and significantly improved financial market confidence work their way through the economy,” Mr Draghi said.

But a political impasse over the US fiscal policy, which could presage steep tax hikes and budget cuts if a deal is not reached, could also dampen sentiment for longer, he said.

The level of uncertainty was reflected in the ECB’s first attempt to forecast 2014, for which it pencilled in growth of between 0.2 and 2.2%. The midpoint forecast for 2012 was pushed slightly lower to -0.5%.

An inflation forecast of 1.1% to 2.1% next year — compared with the ECB’s target of close to but below 2% — means there appears to be plenty of room to cut rates further.

— Reuters