Pacific Investment Management Co., the manager of the world’s largest mutual fund, said the European Central Bank may need to cut interest rates and do quantitative easing as recessions loom in the region’s two biggest economies.
It’s “likely” that the ECB will lower its benchmark rate even though such a move may not have “any significant impact on the euro-zone economy,” Andrew Balls, Pimco’s head of European portfolio management, said in an e-mailed statement today. That “may preface, over time, a shift by the ECB to implement quantitative easing as we see in other countries,”
The ECB kept its main interest rate at a record low of 0.75 percent this month, even though a majority of policy makers were open to easing borrowing costs, according to three officials speaking on condition of anonymity. The ECB also lowered its economic outlook, predicting contractions of 0.5 percent this year and 0.3 percent in 2013.
Pimco forecasts the euro-area economy will contract as much as 1.5 percent through the third quarter of next year, Balls said. The growth outlook has also weakened for the region’s two largest economies, he said.
“We expect a milder recession in Germany and France over the next four quarters,” Balls said.
ECB President Mario Draghi said on Dec. 17 the ECB’s new bond-purchase program and the creation of a single supervisor will help foster a gradual recovery in the euro area in the second half of next year.
“We have seen significant normalization of euro-zone financial markets owing to the ECB’s Outright Monetary Transactions program,” Balls said. “Yet, these actions and the ECB’s broader funding efforts, while they have helped to avoid a collapse, have been insufficient to promote decent growth.”
While “the ECB can buy time” it cannot “by itself achieve the outcomes of a more stable and prosperous euro zone,” he said.
For the U.K., Pimco expects “the economy to be flattish over the period, owing to the impact of fiscal tightening and the weakness of the U.K.’s biggest trade partners,” Balls said.
Pimco’s so-called cyclical outlook for Europe covers the four quarters through September 2013.