Officials meeting in Frankfurt today kept the benchmark rate at a record low of 0.75 percent, as forecast by 54 of 56 economists in a Bloomberg News survey. Two predicted a cut. President Mario Draghi holds a press conference at 2:30 p.m. to explain the decision.
A botched first attempt to rescue Cyprus last month sent bank shares tumbling across the euro area and rattled confidence in policy makers’ ability to tame the sovereign debt crisis. With doubts growing about Draghi’s forecast for a second-half economic recovery, the ECB is looking at a range of possible measures, three officials with knowledge of the deliberations said yesterday.
They included lower rates, a new round of long-term loans to banks, and a plan to encourage lending to companies, the officials said on condition of anonymity. They stressed that such action may not be announced today.
“Expectations for new measures are justified,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “The ECB wants to do something and I wouldn’t exclude a surprise today. And if the crisis flares up again, interest-rate cuts will also be back on the table.”
With Europe entering a second year of recession and fragmented financial markets preventing the ECB’s record-low borrowing costs from reaching the countries that need them most, Draghi may prefer to use so-called non-standard measures. He is particularly concerned about a lack of credit being extended to small and medium-sized companies in countries such as Italy and Spain, two of the officials said.
The Bank of England held its key rate at a record low of 0.5 percent and maintained bond purchases at 375 billion pounds ($568 billion).
The Bank of Japan (8301) expanded its stimulus program in its first policy decision under new governor Haruhiko Kuroda. The central bank announced it would double monthly bond purchases in a bid to reach 2 percent inflation in two years.
Case for Action
The ECB’s measure of bank lending to the private sector fell for a 10th month in February, dropping 0.9 percent from a year earlier, and manufacturing activity, measured by a survey of purchasing managers, contracted more than economists forecast in March.
“If you look at the world around you, with the economy weak, inflation falling to low levels, the disparities between countries and the credit mechanism not getting any better, you can’t conclude that no further action from the ECB is necessary,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “The case for further action from the ECB remains very strong.”
Still, ECB officials haven’t provided clear guidance on what that further action might be. A rate reduction has been discussed since December, with Draghi saying last month that the “prevailing consensus” was against such a move.
The ECB may be more concerned with what Executive Board member Benoit Coeure on March 12 called the “disconnect” between official lending rates and those that businesses are actually charged.
More than four times as many small businesses in Spain were rejected for loans in the second half of last year than in Germany, or walked away from an offer because it was too expensive, research published by Barclays Plc shows.
While the ECB is studying ways to ease that fragmentation, such as the Bank of England’s Funding for Lending Scheme, Draghi said at last month’s press conference on March 7 that it isn’t “planning anything special.”
An asset-purchase plan targeted at small- and medium-sized business lending is far from straightforward, said Jan von Gerich, chief fixed-income analyst at Nordea Bank in Helsinki.
“There are a lot of expectations but they’re quite limited in what they can do,” he said. “It’s most likely for them to ease collateral requirements and make it easier to package SME loans. But it gets messy quickly and hawkish members are probably not comfortable with it.”
With excess liquidity in the banking sector halving in the past six months, lenders in some parts of the region might be in need of more central-bank funds. Longer-term refinancing operations, or LTROs, have been the ECB’s signature tool to ease tensions in financial markets and encourage lending, and policy makers may resort to this option again if they can’t find consensus on more complex measures, economists said.
Draghi is also likely to be questioned today on the ECB’s role in Cyprus’s bailout. The ECB was party to and welcomed an initial plan to tax all deposits in Cypriot banks, which the nation’s parliament rejected.
While a revised agreement ditching a tax on deposits under 100,000 euros ($128,580) was negotiated over a week later under threat of the ECB cutting emergency funding to Cypriot banks, capital controls have been introduced for the first time in the euro region to prevent capital flight.
The episode damaged investor confidence across the currency bloc. The Stoxx Europe 600 Banks Index (SX7P) dropped 6.8 percent between March 15 and 27, the day before banks reopened in Cyprus.
The cost of insuring against default on European bank bonds surged 41 percent in that period, with the Markit iTraxx Europe Senior Financial Index of credit-default swaps on 25 lenders jumping 58 points to 201.
Allowing a flawed plan to go to the Cypriot parliament exacerbated the financial reaction to the bailout and harmed trust in Europe’s crisis-fighting abilities, said Ken Wattret, chief euro-area economist at BNP Paribas in London, who predicts a rate cut today.
“The error originated in Cyprus, but the error from finance ministers and the ECB was to support it,” he said. “We saw an increase in stress in financial markets and a drop in economic sentiment. What we’re missing is a policy response.”
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