Orphanides Says ECB Should Cut Rates to Fight Recession

Former European Central Bank Governing Council member Athanasios Orphanides said ECB officials should cut interest rates today as the euro area battles the worst recession in its history.

“The ECB should cut rates,” Orphanides said in a telephone interview yesterday. “We are in the middle of a policy-induced recession and monetary policy can do more to contain it, without compromising price stability.”

ECB policy makers gather in Frankfurt today for their first rate setting meeting of 2013 after discussing a cut in the benchmark rate at their last meeting in December. Only five out of 55 economists in a Bloomberg News survey predict such a reduction today, with the rest forecasting the benchmark to remain at a record-low 0.75 percent.

It’s “totally unnecessary for policy makers to stand idly by when they could help” to ease financing conditions for households and companies, Orphanides said, adding that record-high unemployment “is set to get even worse during 2013.”

Spanish Yields

Spain’s 10-year bond yields today fell below 5 percent for the first time since March after the nation sold more securities than planned at its first debt auction this year. That compares with a euro-era record of 7.75 percent in July. It has tumbled since ECB President Mario Draghi’s pledge to do “whatever it takes” to defend the euro, backed up by his announcement of an unlimited bond-purchasing program called Outright Monetary Transactions to buy debt of nations requesting help.

“While there has been an improvement in the monetary conditions and government bond yields, I don’t subscribe to the optimistic view that the worst is behind us,” Orphanides said. “None of the fundamental issues have been addressed and the OMT has introduced a false sense of calm.”

Orphanides, a former U.S. Federal Reserve economist, sat on the ECB’s Governing Council until last May and is now a senior lecturer at the MIT Sloan School of Management in Cambridge, Massachusetts.

Orphanides said he supports Bundesbank President Jens Weidmann’s opposition to the OMT program, as “it has given governments yet again the option to postpone the commitments they have given.”

OMT Justification

With elections looming in at least five countries this year, governments are likely to drag their feet even more and the biggest risk for the euro area is “political inertia that was facilitated by the OMT,” Orphanides said. Without the bond-buying promise, “governments would have had to make progress on implementing their decisions from the June summit by now.”

Draghi justified the OMT by saying it would help fix the pass-through of the ECB’s monetary policy to companies and households and prevent a break-up of the euro area.

“While the transmission mechanism may not be working perfectly well, it’s not completely broken so any additional easing will reduce financing conditions,” Orphanides said. Asked if policy makers should cut the deposit rate, currently at zero percent, he said that “the most important thing for now is to cut the main refinancing rate for banks.”

Joblessness in the euro region rose to a record 11.8 percent in November, with at least every second young Spaniard out of work. The ECB last month predicted the economy of the 17-nation currency bloc will shrink 0.3 percent this year, down from a previous estimate of 0.5 percent growth.

According to Orphanides, that amounts to “the worst recession in the history of the euro area.”

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