Wednesday January 14, 08:50 AM
Eurozone lending rate could hit 2.0 pct when ECB meets: experts
By William Ickes
FRANKFURT (AFP) - The eurozone's benchmark lending rate could drop to 2.0 percent on Thursday if the European Central Bank decides to tackle head-on a recession now spreading across the 16-nation economy.
Bank of America (NYSE: IKJ - news) economist Gilles Moec said he expected a recent flood of bad data "to convince the ECB that a 50 bp (basis point) cut is required" when its governing council meets here on Thursday.
The ECB's main rate is currently 2.50 percent, following three successive cuts since October, but anything less than another reduction of 0.50 percentage points would sorely disappoint markets, analysts said.
The bank (NASDAQ: TBHS - news) has lowered the cost of borrowing much more gradually than the US Federal Reserve or Bank of England, raising criticism that it is not taking the depth of the recession -- the eurozone's first -- seriously.
The Fed, like the Bank of Japan, has taken its benchmark rate essentially to zero, while the BoE cut its last week to 1.5 percent, the lowest level in its 315-year history, to ward off threats of deflation posed by the sharp economic downturn.
Everything in the eurozone argues for lower lending rates as well.
Inflation has fallen to 1.6 percent, below the ECB target of "below but close to 2.0 percent," while industrial indicators are in a free-fall.
"It is becoming increasingly clear that GDP (gross domestic product) in the fourth quarter (of 2008) will be a real disaster," said UniCredit Group chief eurozone economist Aurelio Maccario.
Exports from Germany, the biggest eurozone economy and the world's leading exporter, plunged by 10.6 percent in November alone, the sharpest rate since 1990, as the global recession pulled the plug on demand.
The euro has also remained relatively strong at around 1.3250 dollars owing in part to the eurozone's higher interest rates, curbing exports further.
Unemployment rose to 7.8 percent meanwhile, the highest level in nearly two years and Capital Economics chief European economist Jonathan Loynes said "surveys of employment intentions point to a further sharp slowdown in jobs growth."
In December, eurozone industrial output fell to a record low and orders stayed on a steady path downwards, indicating that activity is far from a rebound, while consumer and business confidence hit a 23-year low.
"The downturn in the eurozone economy has accelerated alarmingly over recent months," Loynes summed up.
"The ECB has no time to lose," added Alexander Krueger at Bankhaus-Lampe, while Maccario forecast that "2009 will be the worst year of the eurozone history with growth in the negative 2.0 percent area."
But analysts were divided over whether the ECB would cut rates by a half point or opt for a more cautious reduction of 0.25 points.
They agreed however that any decrease would not be the last, especially if eurozone inflation dips into negative territory, which many expect to happen briefly later this year.
With the central bank determined to maintain inflation close to 2.0 percent, further sharp interest rate cuts would be called for, and experts widely expect the ECB to go below its current all-time low of 2.0 percent.
UniCredit (Milan: UCG.MI - news) fixed income strategist Luca Cazzulani said his group believed "that on a medium-term perspective, the ECB will likely go into 'unexplored territory' below 2.0 percent and we target 1.0 percent as the bottom for the current cycle."
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