ECB Seen Desisting From Further Rate Cut Until 2015Stefan Riecher and Joshua Robinson
The European Central Bank will refrain from cutting its interest rate again until at least 2015, according to economists surveyed since President Mario Draghi’s pledge last week to deliver another reduction if needed.
The Frankfurt-based central bank will leave its main refinancing rate at a record-low 0.5 percent until the end of 2014, according to the median of 18 forecasts in the monthly Bloomberg survey of economists. The same survey shows that 27 of 32 economists predict no cut in the benchmark by the end of 2013, while five see a reduction to 0.25 percent.
Draghi said on May 2 that the ECB remains ready to act again after it lowered its key rate by a quarter-point the same day. While economists in today’s survey reduced forecasts for euro-region gross domestic product this year, data suggest the 17-nation zone may return to growth after industrial production and factory orders in Germany both jumped more than forecast.
“I don’t expect another ECB rate cut,” said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan. “Inflation will move closer to 2 percent again and we will see moderate economic growth in the second half of this year.”
The euro fell 0.5 percent today after erasing earlier gains, and traded at $1.3091 as of 3:33 p.m. in London. The currency extended its decline against the dollar after a U.S. Labor Department report showed the number of Americans filing claims for jobless benefits dropped last week to the lowest level in more than five years.
Following the lead of the ECB and policy makers in Australia and India this month, the Bank of Korea cut interest rates today as strength in the won and weakness in the yen dim the outlook for the nation’s exports. The South Korean seven-day repurchase rate fell to 2.5 percent from 2.75 percent.
The U.K. interest rate will stay unchanged at 0.5 percent until at least the end of 2014, according to all but two of 19 economists in the Bloomberg monthly survey. The Bank of England today kept its rate steady and refrained from expanding stimulus.
In the euro area, the annual inflation rate dipped to 1.2 percent in April from 1.7 percent a month earlier. That’s the lowest since February 2010. The ECB predicts prices to rise 1.6 percent this year and 1.3 percent in 2014.
Economists in the Bloomberg survey cut forecasts for inflation for the next three quarters and for 2014. Their median predictions are for inflation averaging 1.6 percent in both years. Professional forecasters in a quarterly survey by the ECB released in its monthly bulletin today see inflation at 1.7 percent this year and 1.6 percent in 2014.
The Bloomberg survey also showed a worse outlook for GDP this year. Economists now see a contraction of 0.5 percent instead of 0.4 percent, according to the median prediction. Their forecasts show growth of 1 percent in 2014.
In the ECB survey, economists cut their euro-area GDP outlook for this year and now see a 0.4 percent contraction instead of stagnation.
Unemployment in Greece rose to a record 27 percent in February as the country’s recession left more than six in 10 young people out of work, according to data released today. Statistics in Portugal showed the jobless rate there increased to a record 17.7 percent.
The British economy will expand 0.8 percent in 2013 and 1.5 percent next year, according to the median forecasts of 36 economists in the Bloomberg survey. Economists cut predictions for inflation later this year, with the median prediction of 16 economists now showing a rate of 2.6 percent in the fourth quarter instead of 2.8 percent.
Gross domestic product rose 0.8 percent in the quarter through April, the National Institute for Economic and Social Research estimated today. The London-based group published their estimate after data today showed industrial output expanded 0.2 percent in the first quarter, matching the Office for National Statistics’ estimate published last month.
Today’s report showed U.K. industrial output rose 0.7 percent in March from February, more than three times the 0.2 percent median prediction in a Bloomberg survey of 31 economists, as cold weather boosted demand for electricity and gas. Manufacturing rose 1.1 percent, compared with a 0.3 percent median forecast.
While Draghi expects the euro region economy to “gradually recover” in the second half of the year, he said on May 2 that the “risks surrounding the economic outlook for the euro area continue to be on the downside.” The ECB, in its monthly bulletin today, reiterated that view.
Such an outlook has helped fuel speculation that the ECB might cut its interest rate again.
“There’s a chance for the recovery to not materialize anytime soon and for euro-area growth to be flat next year,” said Nick Matthews, senior European economist at Nomura International Plc in London. “Rates could be lowered again and this may also include a negative deposit rate.”
Forcing banks to pay when parking cash at the central bank would be aimed at spurring them into lending rather than saving. Draghi said last week the ECB has “an open mind” on reducing the so-called deposit rate below zero for the first time.
A potential danger is that a deposit-rate cut may end up hurting banks’ profitability by lowering money-market rates, potentially hampering credit supply to companies and households even further and reducing banks’ incentive to lend to counterparts.
“It’s harder to do than just cutting the benchmark rate,” said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London. He sees a probability of two thirds that the ECB will lower the main refinancing rate by September.
Still, policy makers like ECB Executive Board members Joerg Asmussen and Yves Mersch have argued that cutting the benchmark rate further may have a limited effect and comes with risks.
“The closer we get to zero, the bigger the inefficiency of a further rate cut,” Mersch said at a conference yesterday in Aachen, Germany.
“The decisive question will be whether we are going to see downward pressure on inflation expectations in the months to come,” said Kristian Toedtmann, senior economist at DekaBank in Frankfurt. “I don’t see this happening, and that’s why there probably won’t be another rate cut.”