ECB ‘will wait until June to cut interest rates’

The ECB will wait until its June meeting to cut interest rates, although a move to boost SME lending could be announced at its May meeting, according to Brussels-based chief economist with ING Bank Carsten Brzeski.

Speculation has been growing over the past few months that the ECB would loosen monetary policy even further in an attempt to spur growth in the eurozone economy.

Mr Brzeski argues that the ECB will wait until the June meeting to drop interest rates by another 25 basis points to 0.5% because that is when it is scheduled to release its next quarterly review of the economy. Inflation across the region is averaging 1.7%, which is its lowest level in three years.

But there are no economic data releases between now and the May meeting that would give its president, Mario Draghi, the cover to cut the interest rate, adds Mr Brzeski. The ECB’s last quarterly review in March said the eurozone would stay in recession for the first half of the year, with a recovery not expected until later this year. However, growth has softened.

Moreover, last week, the president of the Bundesbank, Jens Weidmann, said he didn’t think a rate cut would have any effect. “This is also crucial because this is the first time the Bundesbank has not been publicly opposed to a rate cut.”

Because of fragmentation of the European banking system, Mr Brzeski says a rate cut will have little effect on the real economy. “It would be mostly symbolic, though it would affect the exchange rate.”

The ECB has been looking at ways of boosting lending to the SME sector across the eurozone. “It won’t announce any big bazooka at the May meeting — it will be some sort of fudge. It will probably ease up on the collateral rules for SME loans.”

Markets have moved sideways over recent weeks as economic data has been mixed. Chief executive of the InvestRCentre, Rory Gillen, says there is a regionalisation of the global economy. The US is recovering, Britain and the EU are in recession and growth is slowing down in emerging markets.

“It is no coincidence that the US is recovering and the euro zone is not. The US has extremely loose monetary and fiscal policy; it is running a budget deficit of close to 8%. In the eurozone and Britain, they are doing fiscal consolidation.”

Mr Gillen warns that the global economy is fragile and there are a number of factors that could derail growth, including a blow up in emerging market debt.

Yields on long-term emerging market debt are at historically low levels.

However, because of ultra low interest rates across most OECD countries, investors are allocating more of their portfolios to higher risk assets.