The European Central Bank (ECB) is set to make a substantial cut of its benchmark interest rate when its governors gather in Brussels on Thursday for a monthly monetary policy meeting.
With the eurozone economy officially declared in a recession and a larger-than-expected drop of inflation, analysts said the ECB will be both compelled and able to take a bold decision this time.
European Commission President Jose Manuel Barroso said on Sunday that the conditions are ripe for a "very clear" move to cut interest rates further by the ECB.
"It is true that now the conditions are there for a drop in interest rates," Barroso said. "I am awaiting decisions from the European Central Bank that go in this direction."
But he declined to comment on the scale of a possible rate cut due to respect for the ECB's independence.
The ECB Shadow Council, an unofficial panel comprising 15 prominent European economists, recommended that the ECB should cut its key interest rate by a full percentage point from the current 3.25 percent to 2.25 percent.
A Reuters poll published last week showed 56 of 81 economists expected the ECB to cut 50 basis points and another 24 predicted policymakers would go further and cut by either 75 or 100 basis points. Only one analyst forecasted a 25-point cut.
It will be the third time for the ECB to cut its rate in less than two months, which is unprecedented, and the ECB has never made a cut of more than 50 basis points since it was founded in 1998.
Analysts said an aggressive move is justified for the sake of the economy.
Official figures showed the euro zone plunged into a recession due to the financial crisis in the third quarter of this year, for the first time in its history.
Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) forecast the combined economy of the 15 EU nations that use the euro will contract by at least 0.5 percent next year.
In a bid to boost the economy, the eurozone governments have committed billions of euros on their recovery plans, which are centered on more public spending and lower taxes, but they have no power in setting the policy of their shared currency, the euro.
The European Commission suggested in its EU-wide stimulus package last week that the ECB, which is solely responsible for the monetary policy in the euro zone, should continue to cut rates as the currency union has slumped into what will probably be a prolonged downturn.
Meanwhile, the continuous easing of inflation pressure in the euro zone is setting stage for the ECB to make deep rate cuts, analyst said.
The eurozone inflation stood at 2.1 percent in November, down from 3.2 percent in the previous month, the European Union (EU)'s statistics bureau Eurostat estimated Friday.
The sharp drop is the biggest since at least 1991 and puts the inflation rate at the lowest in more than a year, beating expectation of most economists.
Thanks to significant retreats of international oil prices, the eurozone inflation has been on decrease in recent months, following its record high of 4 percent in the middle of this year.
Now the figure came close to the two percent ceiling preferred by the ECB to maintain price stability, allowing the Frankfurt-based bank more room to lower its rate to stimulate the economy.
Since early October, the ECB has made two rate cuts, each time by 50 basis points. Although it was already the most aggressive reduction in the history of the ECB, markets remained disappointed, especially when the ECB only reduced its rate by 50 basis points in early November while the Bank of England unveiled a shock cut three times bigger on the same day.
Although some ECB governing council members are worried that the bank may be in shortage of "firepower" in the future, analysts warned if the ECB fails to make a sizable cut this time, it may fail investors who are expecting that and undermine economic confidence,
"When it meets on Wednesday the central bank's governing council must cut rates, and heavily," the Financial Times said on Tuesday in a comment titled "not a time for hoarding bullets." |
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