Oct. 25 (Bloomberg) -- The European Central Bank could help stabilize the situation in Europe by lowering interest rates as the risk of a recession increases, said Richard Hoey, chief economist at Bank of New York Mellon Corp.
“I don’t think necessarily that the lowering of interest rates will help Europe a great deal but it will halt an additional factor contributing to an emerging credit crunch in Europe,” Hoey told reporters in Amsterdam today. “In Europe the risks of recession are rising daily because of the delay in adopting an appropriate policy response to the stresses.”
The ECB probably made a mistake by tightening monetary policy in a worsening financial crisis to fight price pressures, Hoey said. The central bank increased the main interest rate twice this year to 1.5 percent and resisted calls to cut the benchmark at its meeting on Oct. 6, opting instead to resume covered-bond purchases and yearlong loans to banks.
The ECB may start cutting borrowing costs in November and continue loosening its monetary policy in early 2012, according to Hoey. Rates could be lowered by 50 basis points to 75 basis points, bringing the benchmark as low as 0.75 percent, he said.
That would help “stabilize the situation,” Hoey said. “It may not help Greece that much but it will help France, it will help Italy and it will help Spain.”
German Chancellor Angela Merkel and fellow leaders return to Brussels tomorrow for a second summit in four days to discuss Europe’s bailout fund. Policy makers are jousting with banks over the size of losses they take on Greek bonds while deliberating over leveraging the fund after ruling out tapping the ECB’s balance sheet.
--Editors: Simone Meier, Matthew Brockett
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