Trichet May Keep ECB in Crisis Mode as Global Economy Slows
ECB President Jean-Claude Trichet
Hannelore Foerster/Bloomberg
Jean-Claude Trichet, president of the European Central Bank (ECB).
Jean-Claude Trichet, president of the European Central Bank (ECB). Photographer: Hannelore Foerster/Bloomberg
Sept. 2 (Bloomberg) -- Paul Donovan, deputy head of global economics at UBS AG, talks about the outlook for the U.S. economy and Federal Reserve monetary policy. Donovan also discusses the European Central Bank meeting today. ECB President Jean-Claude Trichet may signal that the bank will stay in crisis mode into next year as the risk of a renewed U.S. recession threatens the euro region’s economic rebound. Donovan speaks with Linzie Janis on Bloomberg Television's "Global Connection." (Source: Bloomberg)
European Central Bank President Jean-Claude Trichet may signal that the bank will stay in crisis mode into next year as the risk of a renewed U.S. recession threatens the euro region’s economic rebound.
Policy makers meeting today in Frankfurt are likely to extend emergency lending measures for banks into 2011, economists said. The ECB’s 22-member Governing Council will also leave the benchmark interest rate at a record low of 1 percent, according to all 57 economists in a Bloomberg News survey.
While the ECB will probably raise its growth forecasts today after Europe’s economy expanded at the fastest pace in four years in the second quarter, U.S. indicators are pointing to a slackening in activity. ECB council member Axel Weber said in an Aug. 19 interview that the ECB should help banks through end-of-year liquidity tensions before determining early next year when to withdraw emergency measures.
“I guess Weber was pre-empting the consensus view of the Governing Council,” said Klaus Baader, co-chief European economist at Societe Generale SA in London. “Increased uncertainty about the growth outlook abroad certainly plays a role. The ECB may not normalize its liquidity provision yet.”
The ECB’s rate decision is due at 1:45 p.m. and Trichet holds a press conference 45 minutes later. Policy makers have so far committed to lend banks unlimited cash at the benchmark rate until at least Oct. 12.
‘Wise’
Weber said in the Bloomberg interview it would be “wise” to keep full allotment in weekly, monthly and three-month refinancing operations until after the end of the year, which is “usually surrounded by some uncertainty regarding the liquidity situation.”
The ECB in May abandoned the withdrawal of the lending measures, which were originally introduced to fight the global recession, as Greece’s debt crisis spread through Europe.
While most of the euro region’s 16-nation economy is now recovering, investors are still concerned about the finances of some member countries. The premiums investors charge to hold Greek, Spanish and Portuguese debt over German bunds are wider than they were before a European Union-led rescue package was announced on May. 10.
“Slowing foreign demand and renewed tensions in the periphery serve as warning signals that the ECB needs to err on the side of caution,” said Nick Matthews, an economist at Royal Bank of Scotland Group Plc in London. The ECB should “follow the Fed in terms of saying they will do anything necessary to counter the downside risks should they materialize.”
Contrast With Fed
The Federal Reserve announced on Aug. 10 it will buy Treasuries to prevent its balance sheet falling below $2.05 trillion and keep interest rates from rising, saying U.S. growth will be slower than anticipated.
By contrast, the euro region’s economy has surpassed forecasts, and Weber said the ECB’s projections are likely to be revised upwards when quarterly updates are published today.
The ECB in June predicted growth of 1 percent this year and 1.2 percent in 2011. The economy expanded 1 percent in the second quarter from the first, driven by 2.2 percent growth in Germany. The U.S. economy’s comparable quarter-on-quarter growth rate was 0.4 percent in the same period.
“There’s a contrast between the direction of travel, downgrading in the U.S. and upside surprises in Europe,” said Peter Westaway, chief European economist at Nomura International Plc in London, who expects the ECB to raise its growth forecast for this year to about 1.4 percent. “Europe is surprising to the upside and recovering quite strongly.”
Global Slowdown
Still, European economic growth may slow as governments reduce spending to tackle bloated budget deficits and the global recovery shows signs of losing momentum. Orders for durable goods in the U.S. increased less than forecast in July, a sign one of the few remaining bright spots in the economy is cooling, while China’s industrial output growth weakened.
“Europe decoupling from the global economy would require domestic demand picking up the slack from the falling exports -- we are a good bit away from that,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “I doubt we’ll be seeing decoupling this time round if the U.S. is really in trouble. Europe is still too dependent on foreign trade.”
To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net
Rate this Page