ECB Could Be Done Helping Eurozone Economy
Cutting rates can stimulate lagging growth by lowering borrowing costs, thereby making it easier for businesses to expand and consumers to spend. But bank officials have questioned how much good further cuts would do. Even with record low rates, businesses still aren't borrowing much due to the weak outlook. Eurozone retail sales slumped 1.2 percent in October, far more than expected.
Low rates and an infusion of around 1 trillion in low-cost loans to banks last December and February are only now showing faint signs of trickling through to the wider economy.
The slack economy, along with lower oil prices, has helped lower inflation to 2.2 percent, closer to the bank's goal of just under 2 percent. Yet even that won't be enough to trigger a cut with rates this low.
Recent statements by Draghi and other council members indicate "that the ECB perceives its job, both on conventional and unconventional policy, as just about done," said Marco Valli, chief eurozone economist at Unicredit. He sees no rate cut "for the foreseeable future."Christian Schulz, senior economist at Berenberg Bank, says that as long as the economy shows even a mild recovery by next spring, "the ECB will not cut interest rates further" and could even be the first major Western central bank to start raising them in late 2013. Not everyone agrees. Analysts at Nomura and IHS Global Insight see a chance for a cut in the first part of next year and don't completely rule out a surprise move Thursday. Howard Archer at IHS says low inflation and slack growth mean that the ECB "has ample justification and scope to take interest rates from 0.75 to 0.50 percent sooner rather than later." The ECB stance contrasts with that of the U.S. Federal Reserve, which is adding support for the US economy by carrying out open-ended purchases of government bonds until unemployment falls. The purchases keep longer-term interest rates down. The U.S. economy is growing, unlike Europe, but could face trouble from the so-called "fiscal cliff" automatic spending cuts and tax increase that would result if Congress and President Obama fail to make a budget deal. The Fed next meets Dec. 11-12.
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