12 October 2001, 09:04 FOCUS ECB decision to hold rates steady merely postpones cut to future meeting
---- by Steve Whitehouse ----
PARIS (AFX) - The European Central Bank decision to hold interest
rates unchanged today merely postponed a rate cut that will now come at
one of the subsequent council meetings, despite apparently hawkish
language from ECB president Wim Duisenberg, economists said.
"It was not a decision on whether or not to cut. It was just a
decision about timing," said Anja Hochberg of Credit Suisse.
"More or less all observers agree that there is scope for a rate
cut and that the ECB should use it, so probably there were more
tactical arguments regarding the best timing of the move that led to
this decision," said Christoph Balz of Commerzbank.
"The rate cut is just postponed in our view," he said.
Duisenberg's comments after today's ECB council meeting in Vienna
appeared to suggest that the ECB is in no rush to cut rates again,
following its exceptional Sept 17 easing move in the wake of the Sept
11 terrorist attacks on the US.
He said the council confirmed its Sept 17 assessment of risks to
price stability and current interest rates remain consistent with price
stability. And he gave an upbeat assessment of euro zone economic
fundamentals, which he said provide a solid base for a recovery next
year once the initial shock from the attacks has been absorbed.
But economists said Duisenberg's comments will not prevent a rate
cut at the next meeting on Oct 25, or at one of the meetings in
November.
"He cannot signal today that they are in a rush to move, because
then everybody would ask 'why haven't you cut today?'. So he cannot
steer expectations of further rate cuts already at today's press
conference," said Balz.
Stephen Webster of 4CAST agreed that the ECB needs to cut further
and may well lower rates at its Oct 25 or Nov 8 meetings.
Hochberg of Credit Suisse said the ECB will cut rates by a further
50 basis points by November at the latest.
The ECB's key main refinancing rate stands at 3.75 pct following
the 50 basis point reduction on Sept 17.
The ECB may have been reluctant to cut rates today partly because
of concerns about the impression it would give if it once again matched
an easing move by the US Federal Reserve, which lowered rates last
week, economists said.
"If they had cut for a third time in six weeks, then they would
have conveyed the impression that they are too much in the footsteps of
the Fed and that the euro area is in recession like the US and that we
have similar structural problems that call for a drastic response from
the central bank like in the US," said Balz.
Indeed, Duisenberg said the ECB had decided not to follow the Fed
because it is not in favour of "short-term and panicky" reactions to
the events of Sept 11.
"It is doubtful if a range of rate changes, coming quickly one
after another would enhance confidence," he said.
Webster of 4CAST said a reluctance to be seen to be following the
Fed may well have been behind today's decision, but it is not a valid
reason for holding back from a rate cut that the euro zone economy
needs.
The ECB may also have been reluctant to cut rates today because of
its aversion to any pressure for rate cuts from politicians.
Euro group president Didier Reynders said this week that the ECB
has "more room for manoeuvre" on interest rates than the Fed, but
Duisenberg responded: "If we have room for manoeuvre it is very
little."
But there was nevertheless evidence of a willingness to cut rates
as more economic data becomes available on the economic impact of the
Sept 11 attacks, particularly in the form of consumer and business
sentiment indicators, economists said.
Duisenberg said the ECB will very carefully monitor data to be
published in the months ahead, and acknowledged that the terrorist
attacks had clearly had a negative impact on economic activity and
confidence, which could delay the resumption of higher economic growth.
And economists said Duisenberg hinted that the ECB stands ready to
cut rates again when he commented: "We prefer to keep our powder dry."
However, there is already plenty of evidence that could have
justified a rate cut now, Webster said.
As long as the US military response to the attacks continues,
people in the US will be nervous and this will be transmitted to
Europe, where growth is slowing and unlikely to pick up until the
second quarter at the earliest, he said.
"I can't really understand why they haven't cut rates at the
earliest opportunity, in the same way as the Fed did," he said. "They
seem to be saying they are happy with rates where they are, but as
earlier in the year when they minimised the effects of the US slowdown
on Europe, I think they are in danger of making the same mistake
again."
Hochberg agreed that the likely US recession is bound to affect
consumer confidence in Europe, but she said confidence will also be
supported by the sharp drop in inflation, which is now under way.
This deceleration in inflation will also give the ECB an additional
reason to cut rates, economists said.
Rates should come down with inflation, to maintain real interest
rates at around 1 pct, said Webster.
ECB rates should therefore already have been at 3.75 pct even
before the Sept 11 attacks, and they now ought to be closer to 3 pct,
he said.
But despite evidence of slowing growth and inflation, economists
said there are also some signs that growth remains relatively robust,
which would explain the ECB's decision to wait for a clearer picture
before cutting rates.
"The situation at the moment doesn't seem to look as bad as most of
us might have thought," said Hochberg, citing recent German data.
German private consumption held up well in the third quarter, and
the August Ifo survey -- which included some responses which came after
the Sept 11 attacks -- was fairly strong, she said.
Economists also noted that Tuesday's 2.0 pct August rise in German
industrial production was above expectations.
© 1999-2024 Forex EuroClub
All rights reserved