Policymakers aim to turn around sovereign yields

European Central Bank meets to discuss potential rate cut

GMT 11:09 2013 Thursday ,02 May

Arab Today, arab today European Central Bank meets to discuss potential rate cut

Refinancing hits 0.75%-low
Bratislava - Arabstoday

Refinancing hits 0.75%-low The European Central Bank convened in the Slovakian capital of Bratislava on Thursday to discuss a rate cut or other possible policy measures. Most ECB watchers appear to be betting on a further reduction in the bank's "refi" refinancing rate, held at an historic low of 0.75 percent since July 2012.
But others argue that such a move may not actually prove particularly effective.
Berenberg Bank economist Christian Schulz believed that expectations for a quarter-point cut in the refi were supported by comments made by ECB chief Mario Draghi at last month's meeting.
"Draghi had announced they would very closely monitor incoming economic data. Since then, sentiment indicators and inflation data have been weak and unemployment on the rise, suggesting that opposition to more action, including a rate cut, should be crumbling," Schulz said.
"We see a 60-percent chance of a rate cut at today's meeting or in June," the expert said.
However, many ECB policy makers -- including most recently ECB executive board member Joerg Asmussen -- do not seem to believe that a rate cut would have much effect on the economy, Schulz said.
Interbank lending rates were close to zero and even peripheral sovereign yields had not been this low since the beginning of the crisis.
"The key obstacle to a growth recovery seems to be the blocked credit channel to the small and medium-sized enterprises (SMEs)," he said.
"We expect the ECB to focus its efforts on this transmission channel," Schulz said.
Draghi could announce new initiatives to help SMEs, potentially by improving the eligibility of loans to this sector as collateral in monetary operations.
The ECB could also announce more collaboration with European and national institutions to create new support schemes for SMEs, the expert said.
Marie Diron at Ernst & Young Eurozone Forecast said it would be "very surprising" if the ECB did not cut interest rates.
"Financial markets expect a rate cut and if the ECB did not want to do it, we believe some governing council members would have flagged their opposition to the measure in recent speeches," she said.
But any monetary easing would "only have a small impact on the economy," Diron cautioned.
The ECB could, however, make it more effective by indicating whether monetary policy will be kept very accommodative for a long time, the analyst suggested.
"The ECB has so far been reluctant to pre-commit but financial markets and businesses need some visibility. Some form of forward guidance, similar to what the US Federal Reserve has communicated, would be helpful," Diron said.
She, too, would particularly watch for though is additional measures, in particular any measure aimed at easing credit conditions for SMEs and peripheral countries.
"The ECB can play a significant role in fostering domestic activity with measures designed to get credit flowing again where it is most needed," Diron said.

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