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European Central Bank

The European Central Bank was established by the Treaty of Amsterdam in 1998 and is headquartered in Frankfurt, Germany. The objective of the bank is to maintain price stability within the euro zone. The president of the ECB is Mario Draghi, former governor of the Bank of Italy.

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Euro-zone rate cut unlikely to boost lending

The European Central Bank may lower interest rates today, but few expect such a move will lead to a surge in loans in the struggling region

PUBLISHED : Thursday, 02 May, 2013, 12:00am
UPDATED : Thursday, 02 May, 2013, 3:47am

The European Central Bank, meeting in the Slovakian capital of Bratislava today, could cut its interest rates from record lows and unveil new measures to kick-start bank lending, analysts say.

Many ECB watchers agree a further cut in the bank's refinancing rate - held at a historic low of 0.75 per cent since July last year - may not be very effective.

But the central bank has few other weapons at its disposal for the time being, analysts argue.

"The latest deterioration of sentiment indicators has clearly increased the chances for more ECB action this week," said ING DiBa economist Carsten Brzeski. "Indeed, the majority of financial market participants even seem to be expecting a rate cut."

But Brzeski said the case for such a move was not quite so clear-cut.

"A rate cut without additional efforts to repair the transmission mechanism would quickly go up in smoke and could even be regarded as an act of desperation," he said.

"It is hard to believe that the ECB would first cut rates and come up with a broader SME [small and medium-sized enterprises] funding scheme later."

ECB board member Joerg Asmussen cautioned last week that additional monetary easing might not prove effective, since it would not reach the countries, or the areas of the economy, that would need it most.

Given the high level of fragmentation of euro-zone credit markets, with the countries worst affected by the debt crisis having to pay higher premiums than core nations, the so-called monetary policy transmission mechanism cannot function properly.

That is the process through which monetary policy decisions feed through into the real economy via a wide range of factors, including money market interest rates and expectations.

Although the ECB has pumped unprecedented amounts of liquidity into banks, the banks do not appear to be lending it to SMEs, which form the backbone of the euro-zone economy. Indeed, SME access to bank loans continued to deteriorate, new data showed last week.

Markit chief economist Chris Williamson said the ECB's decision-making governing council "is widely expected to deliver a quarter-point cut in its main policy rate after disappointing survey data highlighted the spread of the region's downturn to Germany. Analysts are also hoping to see the ECB discuss non-standard measures, notably to help lift banking lending in the region's struggling periphery".

UBS economist Reinhard Cluse said any moves to get credit flowing again to the SMEs would take time, because they were likely to require the European Investment Bank to become involved, and that would need the agreement of the EU and national governments.

"A top-level agreement could probably be reached relatively quickly. However, the problem with such a loan guarantee scheme is that it would take quite a bit of time to roll it out at the micro-level and that it is therefore unlikely to achieve quick results," Cluse said.

Slowing euro-zone inflation - to 1.2 per cent last month from 1.7 per cent in March - would give the ECB room to trim rates.

And in Germany, the bloc's biggest economy, inflation was as low as 1.1 per cent, "confirming that underlying price pressures in even the euro zone's strongest economies are very weak. This should all encourage the ECB to announce additional policy support," said James Howat at Capital Economics.

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