ECB in spotlight as euro-zone credit stays weak

FRANKFURT: The European Central Bank finds itself in the spotlight this week as it mulls ways of curbing expectations of rising interest rates and boosting chronically weak credit in the euro-zone.

The ECB’s governing council will hold its regular policy meeting in Paris rather than its usual venue of the bank’s Frankfurt headquarters. And the meeting is being brought forward to Wednesday as a result of the national public holiday in Germany on Thursday. Nevertheless, ECB watchers are confident that central bank chief Mario Draghi will not announce any moves in interest rates or other policy measures, even if the heat is on to bolster rapidly falling credit in the 17 countries that share the euro. Recent better-thanexpected data mean a further cut in ratesfrom their current historic lows of 0.5 percentis unlikely, analysts said.

“The firmer tone of the economic data has ruled out any change in interest rates,” said Capital Economics’ Jennifer McKeown.

“The further reduction in liquidity in the banking sector could prompt the council to announce additional LTRO (long-term refinancing operations), but there are question marks over their likely effectiveness,” she said. New ECB data last week showed that lending to businesses in the debt-mired

Euro-zone is continuing to contract sharply, undermining momentum of the tentative recovery in Europe’s crisis-battered economy.

The ECB already flooded euro-zone banks with more than 1.0 trillion euros ($1.35 trillion) in cash via two LTROs at the end of 2011 and the beginning of 2012 in a bid to avert a potentially disastrous credit crunch. And ECB chief Draghi told a hearing at the European Parliament in Brussels last week that another LTRO could be on the cards.

UniCredit chief euro-zone economist Marco Valli believed “the ECB will launch another LTRO in the coming months.” Nevertheless, the timing of such a move was “highly uncertain,” the expert cautioned. “While the ECB is having an open discussion on liquidity, there was no specific focus on any particular instrument,” he said, pointing out that ECB executive board member Benoit Coeure had suggested that pumping more liquidity into the system “is not an urgent necessity.”

Commerzbank economist Michael Schubert also believed that the current situation is nowhere near as dangerous as when the ECB launched the previous LTROs. Such action this time round would be like “using a sledgehammer to crack a nut,” Schubert said. “We doubt whether ... a new LTRO would be proportionate to the magnitude of the problem,” he said. Money market rates in Europe have been rising recently amid talk about a so-called “tapering” or winding down of anticrisis measures by the US Federal Reserve on the other side of the Atlantic, Schubert believed. But the US Fed recently sought to counter such speculation by insisting it will keep its foot on the monetary stimulus pedal. Furthermore, recent economic data for the single currency area had surprised to the upside, also adding to expectations of a possible end to expansive monetary policy.

But “the phase of positive data surprises of the euro-zone is over,” the Commerzbank economist said. Speculation of rising rates in Europe was therefore likely to diminish and without those, “there will probably be no new LTRO,” he concluded. ING DiBa senior economist Carsten Brzeski believed the combination of the three factors-the Fed, higher money market rates and lacklustre credit growthcould mean that action was needed from the ECB and not just words.

And “the strategy of words without deeds could soon wear out.” By launching a new LTRO, the ECB “could kill three birds with one stone,” Brzeski said. “It would ease liquidity tensions, lower money market rates and credibly lock in its forward guidance.

“Consequently, we expect further ECB action in the next six months, with liquidity operations being the preferred option,” Brzeski said. Valli at UniCredit said that he had so far believed a new LTRO would come before the end of the year. “Now, this conviction has weakened a bit. A delay of the Fed’s tapering increases the probability that the ECB may decide to wait until early 2014 before acting,” he concluded.— AFP