ECB to cut rates sharply on Thursday, analysts forecast
FRANKFURT (AFP) — The European Central Bank should cut its main lending rate sharply on Thursday to boost a slumping eurozone economy, and more reductions are waiting in the wings, analysts say.
The vast majority of 47 analysts polled by Dow Jones Newswires said the ECB would cut its benchmark rate by a half percentage point to 3.25 percent, and most see it falling much lower by mid 2009.
ECB president Jean-Claude Trichet dropped a broad hint last week when he said it was "possible" that policymakers would agree to a second cut a month after the ECB, the US Federal Reserve and five other central banks lowered rates in an exceptional coordinated action to boost financial markets .
EU finance ministers were hoping for a rate cut, French Finance Minister Christine Lagarde said Tuesday after chairing a meeting with EU counterparts.
"We are holding our breath," said Lagarde.
The European Commission has warned that the worst financial crisis for generations has pushed the 15-nation eurozone economy into its first technical recession -- two successive quarters of economic contraction -- since the bloc was formed in 1999.
"We were badly mistaken with the different sequences of this crisis," the head of the Eurogroup of nations, Luxembourg Prime Minister Jean-Claude Juncker, told European Parliament members on Tuesday.
The EU commission now forecasts eurozone growth of just 0.1 percent in 2009, following an expansion of 1.2 percent this year.
Unemployment was also expected to begin rising again next year.
Meanwhile, stock markets were slammed in October during one of their worst months on record, as investors sought to convert whatever they could into cash.
"With the economic outlook deteriorating rapidly, the ECB looks set to cut interest rates aggressively over the coming months," Capital Economics economist Ben May said.
The financial crisis and global economic slowdown have also triggered a plunge in oil prices, which stood near a 21-month low point under 59 dollars a barrel in London trade on Tuesday, well off their high of 147 dollars in July.
That trend has eased pressure on inflation, which hit a record 4.0 percent the same month.
Inflation is now around 3.2 percent, and should soon fall further towards the ECB's medium-term target of just below 2.0 percent.
Rising unemployment should reduce the chances of higher wage demands fueling a second round of inflation of which the ECB has repeatedly warned.
Against that background, "we look for the ECB to reduce rates by 50 basis points (a half percentage point) at its November meeting, and to follow up with a further 50 bp cut no later than January," Bank of America senior economist Holger Schmieding said.
Central banks have already begun to slash lending rates, with the Fed now at a record low of 1.0 percent and the Bank of Japan at just 0.3 percent.
In London, the Bank of England is tipped to cut its rate of 4.50 percent on Thursday by at least half a percentage point, with Citbank saying it could go for a full point, though the BoE has never exceeded a half-point change in the past.
The euro now trades for around 1.27 dollars, well off its record high above 1.60 dollars in mid July, though the drop has yet to benefit eurozone exporters owing to weaker global activity.
Trichet was also expected to outline a forthcoming bank lending survey likely to show that credit conditions were set to tighten further.
Lending has become more restrictive despite central bank decisions to pump huge amounts of the world's major currencies repeatedly into money markets.
The question now is how far the ECB might go in what is shaping up as a cycle of major rate reductions.
Jennifer McKeown at Capital Economics staked out the low lands with her forecast that rates would "fall all the way to 1.5 percent next year," while most others were expecting the bank to go to 2.0 percent, its current all-time low that stretched from June 2003 to December 2005.
