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The European Central Bank will probably make its last interest rate cut for a long time in April, leaving the main refi rate at 1.0 percent until the end of 2010 to support a struggling economy, a Reuters poll found.
Economists also gave a 50 percent chance that the ECB would follow other major central banks with a policy of quantitative easing - effectively printing money - in the next few months, a finding which was unchanged from a Reuters poll on March 5.
A fierce recession has persuaded most economists that the ECB will have to lower borrowing costs again, even though euro zone rates are unlikely to reach the close to zero levels which other major central banks have adopted. Sixty-three of 78 economists in the poll, which was taken on March 23-25, said rates would be cut by 50 basis points to another new low of 1.0 percent in April. Six said a smaller 25 basis point cut was more likely, while nine said the Governing Council would leave them unchanged when it meets on April 2.
"As the growth outlook has deteriorated further markedly during the last few weeks, we expect the ECB to cut rates to 1 percent in April. This will possibly be the last cut," said Michael Schubert at Commerzbank.
The ECB has cut rates five times from 4.25 percent since last October as the economy went from bad to worse. Economic indicators have been consistently bad throughout the first quarter. On Wednesday Germanys widely-watched Ifo index showed corporate sentiment fell to its lowest level in March since reunification in 1990.
The poll showed rates ECB on hold at 1.0 percent until the end of 2010. However, 23 of 76 economists predicted rates will be below that level by September this year.
In the meantime it could also cut the deposit rate, analysts said. The poll also showed the ECB trimming the deposit rate at its April meeting to 0.25 percent from the current 0.5 percent. The ECB rewidened the gap between the deposit rate and its benchmark interest rate to one percentage point in January with the aim of discouraging banks from hoarding massive amounts of money in its overnight deposit account. Any cut is likely to be the last move for the deposit rate for some time too, as a zero rate would create problems in money markets.
After that, economists are split on whether the ECB will follow the US Federal Reserve, the Bank of Japan and the Bank of England into large asset purchases to increase the money supply as a measure to support the economy. Analysts agree that the ECB, which sets rates for 16 countries, faces far bigger technical problems than the other central banks which set monetary policy for only one country. The ECB would have to overcome political and legal hurdles if it were to decide to purchase government securities outright.
But if it did start a scheme, it would probably do so in the second or third quarter this year, analysts said. President Jean-Claude Trichet said in a recent interview that the ECB was keeping the option of such purchases open, but gave no hint that they were likely soon. For now, a focus on helping bank liquidity seems more likely.
"They will want to pursue what they are already doing, extending the credit to banks, and they could intervene on the FX markets if they want to limit the strength of the euro. But they do not seem keen on buying securities," said Javier Perez de Azpillaga at Goldman Sachs.
He said the ECB would look at buying securities only if it feared deflation in the euro zone, which it now says it does not expect. The ECB is already using some unconventional measures such as providing unlimited liquidity to banks with maturities of up to six months, thereby expanding its own balance sheet considerably.

Copyright Reuters, 2009

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