ECB unlikely to cut more than 50bp March

ATHENS - The European Central Bank is unlikely to cut interest rates by anything more than 50 basis points at its March meeting as it approaches the lower limit of rate policy, Governing Council member George Provopoulos said.

By (Reuters)

Published: Tue 24 Feb 2009, 7:47 PM

Last updated: Thu 2 Apr 2015, 3:57 AM

In an interview with Reuters, Provopoulos said he could not exclude a cut of 25 or 50 basis points—or even keeping rates on hold at 2.0 percent—and the decision would depend on new ECB staff economic forecasts.

But any move in March would reduce the scope for further action, he said in the interview conducted on Monday. The ECB has cut rates by a total of 225 basis points since last October, more than halving benchmark euro zone borrowing costs.

Provopoulos also said the ECB, which is already providing extra liquidity to lubricate the economy, was unlikely to announce further measures to complement its rate moves at the March 5 meeting. Consideration of steps such as buying corporate debt were at a very early stage, he said.

Asked about expectations that the ECB would cut rates to 1.5 percent next week, he said: “I do not exclude any possibility, including a cut of such a magnitude ... if the new projections justify such a cut. We will have to wait for the March projections and our assessment on March 5 of the latest economic and monetary data.”

A cut of more than 50 basis points “cannot be excluded a priori, but it is unlikely”, he said, adding: “It is also clear that a potential move in March, independently of size, will reduce the room for further moves in the future.”

ECB staff are expected to slash the outlook for both inflation and GDP in the 16-nation region, from forecasts in December for growth of between 0 and -1 percent this year and inflation of about 1.4 percent.

Provopoulos said he had no reason to doubt the validity of the latest forecasts from the European Commission and International Monetary Fund, which now see the economy contracting this year by 1.9 percent and 2.0 percent respectively.

“I cannot exclude that further downward revisions to staff growth projections might be forthcoming. We will have to await the March staff projections to see,” he said. “I cannot exclude that our projections will be worse or better than those of the IMF and the EC.”

The euro zone economy shrank 1.5 percent in the fourth quarter, and manufacturing and services activity hit a new low in February, survey data shows.

Llower limit approaching

Inflation rates would drop close to zero—or possibly turn negative in some countries—in mid-year but the ECB would look through this period as a temporary blip.

“If in May or June we have inflation of zero, that does not mean the official rate will be based on that, because this will be only temporary,” said Provopoulos.

It was “not unfeasible” that inflation, which the ECB aims to keep below but close to 2 percent, would average below 1 percent this year, but the staff projections were key.

In the medium term, he expected inflation to be in line with price stability and deflation was not a realistic prospect.

Provopoulos declined to say whether analysts’ expectations for interest rates to hit 1 percent by June were justified but zero interest rates were “unimaginable”.

“It is clear that we are now approaching the lower limit, that is, a level at which we cannot go any further,” he said.

Rates could be on hold after March “if the economy begins to stabilise with inflation expectations firmly anchored consistent with our definition of price stability”.

Not yet ready for credit easing

Other central banks including the U.S. Federal Reserve, the Bank of Japan and the Bank of England have already cut rates to 1 percent or lower, and announced plans to buy assets to support economies battered by the financial market crisis.

But Provopoulos said it was unlikely the ECB would announce plans for similar action as early as March.

Policymakers had never discussed buying government debt on the secondary market but were assessing the advantages and disadvantages associated with buying types of corporate debt.

“We are at a stage of exploring the pros and cons of this possibility, but we are at a very early stage of this investigation and I cannot say how this discussion will end up.”

”I think it is highly unlikely in March that we will be able to reach an agreement, given that the study of alternative options will take some time.”

Although no options could be ruled out, buying longer-term corporate bonds could be possible if the ECB aimed to lower medium to long term borrowing costs, he said. However, he added: ”It’s premature to say anything on that.”

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