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ECB Seen Refraining From Further Rate Cuts as Yields Sink

December 05, 2012

ECB Seen Refraining From Rate Cuts as Yields Sink on Bond Plan

A euro sign sculpture stands outside the headquarters of the European Central Bank (ECB) in Frankfurt, Germany. Photographer: Simon Dawson/Bloomberg

The European Central Bank may refrain from cutting interest rates any further after its pledge to buy government bonds lowered borrowing costs and boosted confidence that the euro area can emerge from recession next year.

ECB policy makers meeting in Frankfurt today will hold the benchmark rate at a record low of 0.75 percent, according to 56 of 61 economists in a Bloomberg News survey. They will leave the rate there through 2013 and into 2014, a separate survey shows. A month ago, the median forecast was for a rate cut next year.

Italian and Spanish bond yields have plummeted since ECB President Mario Draghi promised to do whatever it takes to save the euro and announced an unlimited bond-purchase program. That’s helping to ease the strain on the euro region’s third- and fourth-largest economies and fueling optimism that the sovereign debt crisis can be contained, even after the 17-nation currency bloc slipped into recession.

“Economic confidence is slowly stabilizing and financial indicators point toward increasingly effective transmission of the very accommodative monetary policy stance to the real economy,” said Christian Schulz, senior economist at Berenberg Bank in London. “If economic growth returns next spring, as we expect, the ECB will not cut rates any further. Instead, it may be the first major western central bank to raise them again in late 2013.”

New Forecasts

The ECB will announce today’s rate decision at 1.45 p.m. Forty-five minutes later, Draghi holds a press conference at which he will unveil the ECB’s latest economic forecasts, including a first projection for 2014.

Separately, the Bank of England will keep its key rate at 0.5 percent today and refrain from expanding its asset-purchase program, another survey of economists shows. That decision is due at noon in London.

The euro region recorded a 0.1 percent contraction in the third quarter, putting it back into recession three years after it emerged from the last one. Economists said the ECB is likely to cut its economic forecast for next year from September’s prediction of 0.5 percent growth.

“The euro-area economy is worsening rapidly and that opens the door for rate cuts in 2013,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “We expect the ECB to lower its benchmark rate by two steps to 0.25 percent next year.”

Five economists in Bloomberg’s survey forecast the ECB will cut its key rate to 0.5 percent today.

Encouraging Signs

Still, the European Commission’s gauge of economic confidence unexpectedly rose in November after euro-area finance ministers eased the terms of Greece’s bailout to keep it in the monetary union. Spain’s 10-year bond yield dropped to 5.25 percent this week, the lowest since March, and Italy’s fell to a two-year low of 4.42 percent.

While the ECB may predict economic stagnation or even contraction next year, it will forecast growth of about 1 percent for 2014, said Marco Valli, chief euro-zone economist at UniCredit Global Research in Milan. The bank is unlikely to estimate inflation rates significantly below its 2 percent limit, Valli said.

“Although the recovery will be slow to gain momentum, the inflation projection at the policy-relevant horizon is going to be in line with the central bank’s definition of price stability,” he said. “We continue to forecast a steady refinancing rate for the foreseeable future, although the ECB’s easing bias is going to remain in place for several months to come.”

German Concerns

German inflation fears may also make policy makers think twice about cutting rates.

Bundesbank President Jens Weidmann was the only member of the ECB’s Governing Council to vote against Draghi’s bond- purchase plan, known as Outright Monetary Transactions, saying it is tantamount to printing money to finance governments and warning of the risk that it could fuel inflation.

Draghi has reiterated that the ECB stands ready to activate the program as soon as a country like Spain fulfills the pre- requisites of seeking aid from Europe’s bailout fund and signing up to conditions. At the same time, he’s sought to placate German concerns with assurances that the purchases won’t fuel inflation.

“A rate cut could further undermine support of inflation- averse Germans and thus be counterproductive,” said Schulz. “It is pivotal for the ECB to ensure strong OMT credibility. This means ensuring a maximum of support from Germany.”

To contact the reporter on this story: Stefan Riecher in Frankfurt at sriecher@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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