Heat on ECB to act as eurozone crisis deepens

June 06, 2012 | 13:49
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The European Central Bank is coming under increasing pressure to come to the rescue once again as the eurozone debt crisis deepens, with analysts suggesting it could cut interest rates soon.
European Central Bank President Mario Draghi watches waiters bringing tea before he testifies before the European Parliament's economic affairs committee, May 31, in Brussels.

The ECB's governing council usually convenes on the first Thursday of every month for its regular policy-setting session but it is meeting in the bank's Eurotower headquarters on Wednesday owing to a public holiday.

While the majority of ECB watchers believe the bank could cut borrowing costs very soon from their current historic low of 1.0 percent, most analysts believe it will not act this month, preferring to keep its options open.

"With the euro area crisis deteriorating, there is a lot of pressure on the ECB to act but in our view it is unlikely to announce any specific new measure this Wednesday, while obviously keeping the door open to intervene should the crisis worsen," said Silvio Peruzzo of RBS European Economics.

At the meeting, the ECB will also publish its latest quarterly staff projections on inflation and growth which could highlight the downside economic risks for the 17 countries that share the euro.

The figures could bolster the case for a rate cut.

Italian Mario Draghi -- who took over as ECB president last November -- has certainly not shied away from surprise moves in his short career at the helm so far.

Nevertheless, "while flagging the materialisation of further downside risk and the increased uncertainty about the growth outlook, the ECB might want to wait for further corroborating data to conclude that its second half of the year recovery expectations are challenged and hence cut rates," said Peruzzo.

He predicted a rate cut in July, "but we do not exclude the possibility that the ECB might pre-announce it this week, recognising the increasing downside risk to the economy."

ING Belgium economist Carsten Brzeski said the ECB "is caught between a rock and a hard place: opening the fire hose again could lead to political complacency, while doing nothing could accelerate the latest market turmoil."

It will be a "close call," Brzeski said, but he thought it "rather unlikely that the ECB will use the new room for manoeuvre ... this week."

The ECB "looks tired from being the eurozone's fire brigade and seems to have a preference for staying on hold. Despite latest developments in Greece and Spain, it looks likely that the ECB will want to keep pressure as high as possible to tackle political complacency," the analyst predicted.

The ECB has never hesitated to act from the very beginning of the crisis.

It quickly reversed last year's rate hikes to bring eurozone borrowing costs back down to an all-time low of 1.0 percent and embarked on a hotly contested programme of indirectly buying up the bonds of debt-mired countries.

Most recently, in two so-called long-term refinancing operations (LTROs) in December and February, it pumped more than 1.0 trillion euros ($1.25 trillion) into the banking system to avert a dangerous credit squeeze in the euro area.

Nevertheless, ECB officials have all along insisted that such measures cannot cure the root cause of the crisis -- profligate spending by governments.

Natixis economist Cedric Thellier believed the ECB would probably wait until its next meeting in July -- by which time the outcome of Greek elections on June 17 will be known -- before taking any further action.

Greece is heading to the polls for a second time in six weeks after an inconclusive vote on May 6. With the radical leftist Syriza party, chief opponent of a massive EU-IMF bailout accord, tipped to win this time, the election could lead to Greece quitting the single currency.

"We guess (Draghi) will try to save time and ammunition in case of an unfavourable outcome from Greek elections on June 17 and European summit on June 28," Thellier said.

"Then, further support from the ECB might be necessary" in the form of a rate cut or a third LTRO, he added.


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