The European Central Bank will unveil record low interest rates and other ways to pull eurozone members from their worst recession in six decades at a landmark meeting here this week, analysts say. "The May meeting of the ECB promises to be a key signpost in monetary policy, as least for the current year," said chief eurozone economist Aurelio Maccario from the Italian bank UniCredit.
"The ECB Council is seldom likely to make as many decisions as it will at the meeting next Thursday," added Michael Schubert at Commerzbank, with the rate cut probably its last in this cycle.
In addition to lowering the bank's benchmark lending rate by a quarter point to an all-time low of 1.0 percent and pledging to keep it there for a while, analysts think the ECB will extend the length of its unlimited loans to banks from six months to one year. The central bank will have cut its main rate by 3.25 percentage points in seven stages since October, and several ECB governors have indicated that 1.0 percent is as low as they are prepared to go.
That means the bank must also use unconventional means of boosting eurozone lending, and ECB president Jean-Claude Trichet pledged early last month to reveal such measures on Thursday.
He said in a German press interview last week: "The present circumstances are extraordinary. Central banks and governments must therefore resort to extraordinary measures."
The eurozone economy will contract by 4.2 percent this year as Europe suffers its worst recession since World War II, the International Monetary Fund has said in a dramatic mark-down of its previous forecast. The US Federal Reserve and Bank of Japan have cut their main interest rates to essentially zero, while the Bank of England's is currently at 0.50 percent.
The Fed has also embarked upon a vast programme to purchase Treasury debt and other securities, while the BoE's version of this monetary procedure, known as quantitative easing, is to buy government bonds from banks to kick-start lending and ease a credit squeeze. ECB governors have been more cautious than peers at other central banks however, and some may point to positive economic indicators to justify not taking bolder steps this week.
Eurozone business and consumer confidence rose in April for the first time in nearly two years, and the purchasing manager's index (PMI) compiled by data and research group Markit rose to its highest level in six months. Inflation remained at 0.6 percent in April meanwhile, the lowest point on records going back to 1996. But others on the 21-person council that sets interest rates may stress that unemployment hit a more than three-year high of 8.9 percent in March, ensuring a lively debate around the table.
With unemployment tipped to climb above 10 percent later this year, "we think that the Bank will soon embark on a programme of asset purchases to support the economy," said Capital Economics economist Jennifer McKeown. "It is unclear whether it will take the plunge as soon as next week," she added.
The ECB prefers to work through the banking system, rather than circumvent it with direct purchases of corporate debt for example, because banks account for 70 percent of eurozone financing, a much higher rate than elsewhere. "Everything that we have done since the beginning of the crisis has been aimed at putting banks in the position to lend money," Trichet told the German newspaper Sueddeutsche Zeitung. "It is the core function of banks to lend money and we are strongly encouraging them to do their job," he added as an ECB bank lending survey indicated persistently tight credit conditions.
UniCredit's Maccario expects the ECB to eventually buy bonds or securitised assets from banks, keeping them at the centre of its policy framework even though it may be criticised for taking too many risks. Trichet will probably say that "ready-to-use instruments are in the ECB's toolbox and that they stand ready to employ them if lending deteriorates further," Maccario said.
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