Belfast Telegraph

Speculation mounts of cut in EU interest rate

Speculation was mounting today that a cut in European interest rates was imminent.

It follows comments from European Central Bank president Jean-Claude Trichet.

If ECB moves to reduce rates it should bring down the value of the euro, which is almost at parity with sterling.

The euro soared by over 32% against the pound last year, which recorded its worst yearly performance against the euro since the single currency’s inception a decade ago.

The current interest rate in the Eurozone is 2.5% compared to the Bank of England base rate of 2%.

The ECB, which has its headquarters in Frankfurt, is due to meet on January 15.

Mr Trichet, who has stressed that inflation should not fall much below 2%, has hinted at a January interest rate cut.

“We are concentrating at present on the impact of our previous decisions,” said the ECB chief in an interview with the German financial daily Boersen Zeitung.

He added: “I always stress, we are never pre-committed and we always do what is necessary to solidly anchor inflationary expectations in the medium term.”

Several bank directors and governors, including Mr Trichet, have sought to dampen such speculation, but with inflation falling much faster then expected, the threat of deflation has recently begun to surface.

His comments came as new figures showed loans to households and companies in the euro area slowed for the 11th month in succession after banks tightened credit standards.

Private sector lending rose 7.1% in November after an increase of 7.8% in October, the European Central Bank said. That's the lowest level in four years.

M3 money supply, which the ECB uses as a gauge of future inflation, slowed to 7.8% from a year earlier as demand for the most liquid assets retreated.

Economists had expected the rate to decelerate to 8.5% from 8.7% in October, the median of 28 forecasts in a Bloomberg News survey shows.

The euro-area economy is fighting its first recession in 15 years and the Eurosystem staff expects growth to contract in 2009.

Retreating commodity prices and easing inflation pressure allowed the ECB to lower borrowing costs by a total of 175 basis points since early October, and more rate cuts may follow as early as January.

“The ECB will continue to watch money-supply growth, but it is aware of the fact that we're seeing safe-haven and portfolio effects,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt.

“Policy makers don't care about investment shifts. They'll look at the availability of loans and there we have to fear a crunch.”

Credit standards for loans to companies tightened “significantly” in the third quarter and should remain “broadly unchanged” in the final three months of 2008, the ECB said in its latest quarterly bank lending survey.

Meanwhile, the euro interbank offered rate, or Euribor, that banks charge each other for three-month loans, fell this week to its lowest level since May 31, 2006, according to data from the European Banking Federation.

Belfast Telegraph