ECB under pressure to cut lending rate
The European Central Bank will likely keep its main lending rate
steady on Thursday amid unprecedented market turbulence but pressure is
building for a cut in the coming months, analysts say.
ECB president Jean-Claude Trichet has repeatedly cited inflation
risks for the ECB's insistence on holding interest rates steady or even
increasing them, as in July, instead of going for a reduction to spur
slumping economic growth.
Most analysts fully expect the ECB to leave rates on hold at 4.25
percent when its governing council meets in Frankfurt despite a slowdown
in inflation and the worst financial crisis since the Great Depression
of the 1930s.
However, at some point, they believe an interest rate must come,
perhaps as part of a coordinated move to encourage the commercial banks
to begin lending again so as to avoid a deep and long lasting recession.
"In the current environment, it's becoming increasing difficult for
the ECB to maintain the view that inflation remains the predominant
concern," UniCredit Markets economist Marco Valli said. Inflation in the
15-nation eurozone eased for the second month running in September to
3.6 percent, from 3.8 percent in August and a record 4.0 percent in
July.
That is still way above the ECB's target of just below 2.0 percent
but it reinforces the view that inflation might finally have peaked.
Additionally, the latest survey of eurozone business confidence
showed it dropped in September to its lowest level since just after the
2001 terror attacks on the United States.
Meanwhile, the failure Monday by US lawmakers to approve a
700-billion-dollar (485-billion-euro) plan to bail out the US banking
system rattled European leaders struggling to protect their own banks.
"In such an environment, the pressure on the ECB to cut rates is
mounting," Bank of America economist Gilles Moec said, adding that
inflation risk will remain a major concern of the bank.
For UBS economist Sunil Kapadia, "the question on investor's lips at
the moment is: Will the ECB cut rates in 2008?"
Most analysts feel an immediate decrease is out of the question
because the ECB raised its rate in July and such a quick about-face
could spark panic in tense financial markets.
AFP |