European Central Bank President Jean-Claude Trichet will step down next October with the euro area still needing record-low interest rates, say the economists who accurately predicted the region’s monetary policy this year.
The Frankfurt-based central bank will keep its key interest rate unchanged throughout 2011 amid low inflation, moderate growth and persisting fallout from the sovereign-debt crisis, said 12 of 17 economists in a Bloomberg News survey. The sample was taken among forecasters who correctly anticipated in January that the ECB’s benchmark would stay this year at 1 percent.
The new year approaches with Trichet celebrating his 68th birthday this week after leading Europe’s response to the turmoil, which at one point threatened to destroy the single currency and has already engulfed Greece and Ireland. Even after those nations received international bailouts, the cost of insuring Greek debt yesterday rose to its highest in a month and investors speculate that Portugal may be next to require aid. The euro has fallen 8 percent against the dollar in 2010.
“The ECB will be patient, cautious and prudent,” said Cedric Thellier, an economist at Natixis in Paris. “Growth will be not very dynamic and inflation will undershoot the ECB’s target.”
The 17 economists questioned this month participated in a similar survey of 61 forecasters in January on the outlook for ECB policy in 2010. The median forecast then was the benchmark would be at 1.5 percent now with Deutsche Bank AG and Bank of America Merrill Lynch analysts among those predicting 2 percent.
The ECB cut its rate to 1 percent in May 2009 to fight the worst recession in its history. A year later the central bank began buying government bonds for the first time to ease credit-market tensions as investors focused on outsized budget deficits. As recently as this month, the ECB was forced to delay a further withdrawal of unlimited liquidity support to euro-area banks.
Portugal’s credit rating was downgraded on Dec. 23 by Fitch Ratings to A+ from AA-. The company said in a separate report the same day that the euro area faces a “systemic” crisis.
The ECB this month forecast growth will slow in 2011 to about 1.4 percent from this year’s 1.7 percent, while inflation will advance to 1.8 percent from 1.6 percent. That’s still under the bank’s target of just below 2 percent. The region will expand in size in January as Estonia becomes its 17th member.
David Owen, chief economist at Jefferies International Ltd. in London, said the ECB’s numbers imply the “weakest growth on record.” Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, New York, predicts the economy will “lapse into a deep recession, squeezed by a credit crunch and plagued by multiple bank failures.” Both forecasters expect no change in the main interest rate next year.
Adding to pressure on growth is the push to curb budget deficits to pacify investors. Portuguese 10-year bond yields rose by almost half a percentage point in the past two weeks. Those on similar Greek securities have returned to the 12 percent level they reached in May. The cost of insuring Greek debt climbed yesterday to 1,020, according to CMA prices for credit-default swaps.
Measures to restore order to budget deficits will amount to 1.3 percent of the euro zone’s gross domestic product in 2011, with Ireland and Portugal cutting back about 4 percent and Greece as much as 6 percent, according to Julian Callow, chief European economist at Barclays Capital. He also forecasts no rate change in 2011.
Analysts at UniCredit SpA, Royal Bank of Scotland Group Plc and Standard Chartered Plc are among five forecasters expecting the ECB to begin rate increases in the second half of 2011.
“The ECB will want to start re-establishing its anti-inflation credentials,” said Sarah Hewin, senior economist at Standard Chartered in London, whose forecast for a 1.75 percent rate was the highest of those surveyed. Jacques Cailloux, chief euro-area economist at RBS, expects an increase to 1.5 percent as strength in core economies such as Germany keep them “ring-fenced” from debt strains.
Surging bond yields prompted the ECB to step up bond purchases following Ireland’s aid package. The region’s central banks have bought 72.5 billion euros ($95 billion) of government debt since the bond program was announced in May. The ECB has also committed to aid banks with as much liquidity as needed through the first quarter for periods of up to three months.
“The ECB made very clear that in their view the crisis needs to be resolved by governments,” said Ken Wattret, an economist at BNP Paribas SA in London and another forecaster who was right in 2010. “But governments aren’t very quick, so the ECB is going to feel continuously obliged to step in.”
Economists are divided over how long the ECB will take to return to its pre-crisis refinancing system of cash auctions. While Greet Vander Roost at KBC Asset Management in Brussels expects the exit to be finished by the end of the second quarter, Citigroup’s Michels says the ECB will keep supplying unlimited liquidity in weekly operations into 2012.
Michels’s scenario would turn responsibility for normalizing ECB monetary policy to the next president as Trichet’s central banking career comes to an end after almost two decades and eight years at the ECB. Who will replace him will be a subject of heated debate for leaders next year with Bundesbank President Axel Weber and Bank of Italy Governor Mario Draghi most often linked to the job.
“By next November it ought to be a lot clearer how the crisis is playing out,” said Callow of Barclays Capital. “The challenge for Trichet’s successor is to mold the euro area into a more cohesive economic and financial entity.”
ECB Rate at end of 2011 Analistas Financieras International 1 percent Barclays Capital 1 percent BHF-Bank AG 1.5 percent BNP Paribas SA 1 percent Capital Economics Ltd. 1 percent Citigroup Inc. 1 percent High Frequency Economics Ltd. 1 percent Jefferies International Ltd. 1 percent JPMorgan Chase & Co. 1 percent KBC Asset Management 1 percent Lloyds TSB Corporate Markets 1.25 percent Natixis 1 percent Royal Bank of Scotland Group Plc 1.5 percent Standard Chartered Bank 1.75 percent Societe Generale SA 1 percent UniCredit SpA 1.25 percent Wermuth Asset Management GmbH 1 percent