ECB to start year with rates on hold: Analysts
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ECB to start year with rates on hold: Analysts

Last Updated: Thursday, January 09, 2014, 10:00
 
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ECB to start year with rates on hold: Analysts
Brussels: The European Central Bank will not announce any rate changes at its first meeting of 2014 on Thursday, but may have to take more concrete action later, analysts said.

The ECB`s policy-setting governing council sits down to its regular monthly rates meeting later on Thursday and central bank watchers expect no new measures after a surprise rate cut in November.

ECB president Mario Draghi effectively said as much at the end of December, when in an interview with the German news weekly, Der Spiegel, he said: "At the moment we see no need for immediate action."

The ECB took markets by surprise in November and pared back its central "refi" refinancing rate by a quarter of a percentage point to a record low of 0.25 percent.

The reason behind the move was an expectation that the single currency area is facing a prolonged period of very low inflation.

Inflation is still low and the recovery cautious at best, but analysts believe the bank will leave policy at that for now.

"The bottom line is, we expect the ECB to keep its policy rates unchanged at the January meeting," said Goldman Sachs economist Dirk Schumacher.

But the ECB "will continue its dovish rhetoric," he added.

RBS economist Richard Barwell agreed.

"We expect no change in the policy stance this month, despite the weak macro outlook in the eurozone," he said.

"More action requires more pain: we suspect there has to be material downside news relative to the latest December projections to unlock further stimulus."

Area-wide inflation picked up fractionally in November, but analysts believe that does not sound the all-clear and the ECB may have to take further action again at some point.

At its December meeting, the ECB fractionally upgraded its growth forecast for the economy of the 18-member currency bloc to 1.1 percent.

And in 2015, gross domestic product GDP growth should reach 1.5 percent, the central bank predicted.

New sentiment indicators since then "suggest that the recovery is at least as strong as the ECB had forecast in December," said Berenberg Bank economist Christian Schulz.

"Strengthening domestic demand in Germany and an export-led recovery in the fast-reforming crisis countries should allow the eurozone economy to grow by at least the 1.1 percent the ECB currently expects for 2014. Upside surprises are possible," Schulz said.

In addition to changing interest rates, the ECB could pump more liquidity into the financial system to get credit flowing again between banks and businesses, crucial if any economic upturn is to be sustained.

For the moment, loans to businesses in the euro area are continuing to decline, new ECB data showed last week.

Private sector loans dropped by 2.3 percent in November in a year-on-year comparison, after already contracting by 2.2 percent in October, the ECB calculated.

The ECB already pumped more than 1.0 trillion euros (USD 1.3 trillion) into the banking system at the end of 2011 and the beginning of 2012 to avert a potentially disastrous credit crunch.

But the banks preferred to use the ultra-cheap cash to buy up sovereign bonds rather than lend it on to businesses.

To mitigate this, the ECB is considering ways of channelling the cash directly to businesses if it decides to open the liquidity gates once again.

ING DiBa economist Carsten Brzeski said that Draghi`s comment that there was "`no immediate need to act` were a clear signal that this week`s ECB meeting will not bring changes.

"That said, the determination to fight any deflationary tendencies in the eurozone remains. At the current juncture, particularly a stronger euro exchange rate could dent the ECB`s calm mood and lead to further action," even if such action "might not come this week," Brzeski said.


AFP

First Published: Thursday, January 09, 2014, 10:00


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