ECB trims rates, to announce any alternative steps
Written on May 8, 2009
The European Central Bank cut its main interest rate on Thursday to 1.0 percent, and financial markets are now focused on any alternative policy measures the ECB reveals to get the euro zone economy back on its feet.
The ECB lowered the refi rate by a quarter percentage point, and economists will await any comments by President Jean-Claude Trichet at his 1230 GMT news conference on whether it has reached a floor or still has room to go lower.
However, the ECB kept the overnight deposit rate, which is acting as a floor for money markets, at 0.25 percent, narrowing the gap between its policy rates instead of cutting the lowest of these to zero. The marginal lending rate was cut by 50 basis points, to 1.75 percent.
“The rate decision was no surprise, but it is all about the language that will go with it,” said Royal Bank of Scotland economist Jacques Cailloux. “The question is whether they will provide indication if the door remains open for further cuts or whether they close the door entirely.”
There is a strong feeling that this was the final cut in a cycle where the Governing Council has slashed the refi rate from 4.25 percent since last October. (For graph, click here)
The euro rose against the U.S. dollar to $1.336 at 1150 GMT and government bond futures inched lower.
Several policymakers have said they are unwilling to go below 1 percent for practical and psychological reasons. Attention is now turning to the ECB’s stance on extra steps, such as the asset purchases adopted by other central banks free credit report.
Analysts polled by Reuters were unanimous that the ECB would cut rates by 25 basis points to a fresh record low. Most of them expect the ECB to have reached the rate floor after Thursday’s move.
SPLIT
Trichet has promised to reveal at the news conference what, if any, further unconventional tactics the ECB will use. Judging by recent public comments, policymakers were split on what to do before the meeting started.
Comments from some, including Axel Weber and Juergen Stark, suggest that the ECB is likely to double the maximum period that commercial banks can borrow funds to 12 months.
Weber, who heads Germany’s Bundesbank, has also suggested that any move on extending loan maturities should come with a guarantee that interest rates will not be cut further.
Other ECB members, including Vice-President Lucas Papademos and Athanasios Orphanides, have floated a bolder approach of buying assets such as bank bonds or commercial paper.
Economists are equally divided on the ECB’s likely path.
Cailloux said the deteriorating economy warranted low rates, and added that if the ECB does not want to cut further, it should do something else to boost the economy.
Filed in: finance.