ECB to hold fire on rates

December 03, 2012 - 12:00:11 am

FRANKFURT: The European Central Bank will lower its growth forecasts for the euro area at its last policy meeting of the year, but also argue that cutting rates is not the appropriate response yet, analysts predict.

With ECB interest rates already at record lows and its latest anti-crisis weapon ready and primed for action, central bank chief Mario Draghi will insist once again that the ball is in the court of the governments to find a way out of the long-running crisis, economists said.

Draghi said as much in a French radio interview on Friday. “We will succeed on condition that governments act,” he told Europe 1 radio.

“We will do what is needed, and we are ready to intervene again if it is necessary... even to an unlimited extent”. But it was essential that governments get their economies and finances in order, Draghi said.

“The ECB perceives its job —both on conventional and unconventional policy — as just about done,” said UniCredit chief eurozone economist Marco Valli.

Market tensions have indeed eased since the ECB unveiled its anti-crisis bazooka in September, the so-called OMT bond-purchase programme.

The scheme is credited with marking a turning point in financial market sentiment towards the crisis-wracked euro even though it has not actually been used.

In fact, the ECB has kept its gunpowder dry since then, keeping interest rates at their all-time low of 0.75 percent and also holding fire on other emergency anti-crisis measures, after pumping vast amounts of liquidity into the markets earlier this year.

But with the central bank scheduled to publish its updated economic forecasts for 2012 and 2013 and its preliminary estimate for 2014, the spotlight is back on whether there is room for more rate cuts, analysts said.

“Conventional monetary policy will stay centre stage” at the ECB governing council meeting on Thursday, said UniCredit’s Valli.

There is some debate, however, on the effectiveness of further monetary easing since the rate cuts so far have not been feeding through to the countries that would benefit from them most, notably the debt-wracked countries.

AFP

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