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Finance & Stock Groups Forum Index » Mutual Funds » ECB Ready for Deep Rates Cuts
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 Posted: Mon Nov 03, 2008 7:52 am |
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ECB Ready for Deep Rates Cuts
Nov. 3 (Bloomberg) -- Jean-Claude Trichet is extending the European
Central Bank's powers just as it gears up for what may be the fastest
round of interest-rate cuts in its 10-year history.
President Trichet has pushed the central bank's reach into the euro
region's neighboring economies as they struggle to cope with the
financial crisis, and has approved record lending to banks. Economists
predict the ECB will slash its benchmark rate, currently at 3.75
percent, to 2.5 percent by April after a likely cut on Nov. 6.
``The ECB is at times playing the role of lender of last resort for
the whole European financial system,'' said Guillaume Menuet, a senior
European economist at Merrill Lynch & Co. in London. ``Its mandate is
being implicitly expanded.''
While Trichet's remit applies just to the 15-nation euro region, the
absence of an institution charged with financial stability across the
27-member European Union created a vacuum the ECB is trying to fill.
In the past three weeks alone, it gave a 5 billion-euro ($6.4 billion)
loan to Hungary, set up currency swaps with Denmark and Switzerland
and increased its lending to euro-region banks to more than $1
trillion.
Hungarian Prime Minister Ferenc Gyurcsany said on Oct. 28 he's
lobbying EU leaders to allow the ECB to provide liquidity outside the
euro area. ECB Executive Board member Lorenzo Bini Smaghi said on Oct.
31 the bank stands ready to help ``other'' eastern European countries
that are ``asking for our help.''
The Hungarian, Polish and Czech stock indexes all fell more than 24
percent last month.
`Major Danger'
Economists expect more rate cuts from the ECB as it tries to cushion
an economy hurtling toward a recession.
The central bank will probably cut its key rate by a half point this
week, taking it to 3.25 percent, according to the median of 50
forecasts in a Bloomberg News survey. It will deliver another 75 basis
points of easing in the following five months.
Consumer and executive confidence in the euro region's economic
outlook plunged by the most since at least 1985 in October, the
European Commission said Oct. 30.
``The ECB is only too well aware that extended, deep recession is now
the major danger facing the euro-zone economies,'' said Howard Archer,
chief European economist at IHS Global Insight in London.
The Bank of England will probably also cut its benchmark by 50 basis
points, taking it to 4 percent, according to a separate survey.
Market Strains
Trichet and other policy makers are still trying to ease strains in
financial markets that are crippling the global economy. Europe's
corporate debt markets endured their worst month on record in October
and the gap between the yields on 10- year German and Italian
government bonds widened to 1.27 percent on Oct. 31, the most since
1997.
The ECB has responded by ramping up lending to cash- strapped banks,
offering unlimited funds. The central bank said on Oct. 21 that
lending to financial institutions jumped to a record, surging 68
percent from the first week of September.
That may create problems for the ECB as the risk of possible
collateral losses grows, says Natacha Valla, a former ECB economist
and now at Goldman Sachs Group Inc. in Paris.
``They have challenges for the future in having a balance sheet of
unprecedented size,'' said Valla. ``The have to know how to deal with
such a balance sheet, how much capital they have to hold, what it
means for risk management. There is a whole set of questions that now
have to be answered.''
Not Alone
The ECB isn't the only European institution trying to guarantee
financial stability. The EU said on Oct. 29 it's ready to contribute
6.5 billion euros to an International Monetary Fund-led rescue package
for Hungary, and European governments coordinated efforts last month
to shore up the region's banking system.
Still, some economists and politicians say the ECB's pivotal position
at the heart of the financial system should be more formally
recognized.
Hungary's Gyurcsany said on Oct. 28 he wants EU leaders to allow the
ECB to accept local government bonds as collateral for foreign-
currency swaps, saying ``it is extremely important from Poland to
Hungary to have these repo facilities in place.''
``My dream is that the ECB gets a financial stability mandate, which
is not the case so far,'' said Valla. ``The ECB really has
demonstrated it can fulfill such a mandate.''
http://www.bloomberg.com/apps/news?p...wBo&refer=home |
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