News | Wednesday, 14 January 2009

ECB interest rate decision tomorrow

Maltese economists concur on a further reduction to combat recession

Charlot Zahra

A panel of economists asked by Business Today about tomorrow’s European Central Bank (ECB) interest rate decision were in consensus that there was still the need for another rate cut after last month’s decision to slash the interest rate to 2.5 per cent.
When asked by this newspaper whether, in their view, the ECB should reduce interest rates further then the current 2.5 per cent, senior economist Edward Scicluna, veteran economist Karm Farrugia, former Labour finance Minister and economist Lino Spiteri and economist Lawrence Zammit were in agreement about a further interest rate cut.
However, there were divergent views on the extent of the cut, ranging from 0.25 per cent proposed by Edward Scicluna to the 1.5 per cent cut suggested by Karm Farrugia.
Governors from the 17 Eurozone meetings will be taking the fateful decision during their monthly meeting at the ECB headquarters in Frankfurt tomorrow morning.
In the previous meeting of the ECB on 4 December 2008, the ECB Governing Council had decreased the main refinancing rate by 0.75 per cent from 3.25 per cent to 2.5 per cent.
The general consensus among international financial analysts was that the ECB should be cutting the interest rate by half a percentage point.
Although equity markets have gained since the start of the New Year and demand for safe-haven government bonds weakened, anything short of a 50 basis point cut to 2 per cent could cause the timid rise in financial market sentiment to recede,” credit rating agency Moody’s said in a note issued last Friday.
The flash estimate for inflation showed price growth slowed to 1.5 per cent in December, below the ECB’s target rate of 2 per cent.
Meanwhile, the composite Purchasing Managers’ Index (PMI) for services and manufacturing fell to 38.2 in December, signaling a contraction in output and activity.

ECB might favour worse off countries - Edward Scicluna
Professor Edward Scicluna told Business Today that there were various economic indicators for the eurozone economy which strongly suggested another cut in the interest rates offered by the ECB.
For instance, in November 2008, the annual rate of growth of the money supply M3 in the euro area decreased to 7.8 per cent from 8.7 per cent in October 2008.
“The three-month average of the annual growth rates of M3 over the period September 2008 to November 2008 decreased to 8.4 per cent from 8.7 per cent in the period August 2008 to October 2008,” Scicluna explained.
“Moreover, euro area annual inflation is expected to be 1.6 per cent in December 2008 according to a flash estimate issued by Eurostat. It was 2.1 per cent in November,” he told Business Today.
In October 2008 compared with September 2008, the euro area industrial new orders index fell by 4.7 per cent. In September the index decreased by 5.4 per cent.
“The first estimate for the euro area trade balance with the rest of the world in October 2008 gave a €+0.9 billion surplus, compared with €+4.2 billion in October 2007,” Scicluna added.
The number of persons employed in the euro area decreased by 0.1 per cent (80,000 persons) in the third quarter of 2008 compared with the previous quarter, according to national accounts estimates published by Eurostat.
“Moreover, total hourly labour costs in the euro area rose by 4.0 per cent in nominal terms in the year up to the third quarter of 2008, compared with 2.8 per cent for the previous quarter,” the senior economist told Business Today.
In October 2008 compared with September 2008, seasonally adjusted industrial production fell by 1.2 per cent in the euro area. In September production decreased by 1.8 per cent.
“Finally, GDP declined by 0.2 per cent in the euro area during the third quarter of 2008, compared with the previous quarter, according to first estimates released by Eurostat. In the second quarter of 2008, the growth rate was -0.2 per cent,” Scicluna said.
“Basing my decision on this economic information, I would recommend to the ECB a 25 basis points cut to the current rate,” the senior economist told Business Today.
Asked for his views on whether or not the ECB would actually cut its interest rate, Scicluna said that if the ECB did not affect an interest rate cut it was “because it might want to give extra weighting to those countries who are not so worse off.
“The development of a schism between the better performing countries led by Germany, and the worse performers such as Greece and Italy, is worrying many economists including the ECB.
“I shudder to think that Malta may soon be listed among these problematic laggards least prepared to weather this international recession,” Scicluna told Business Today.

Recession may intensify - Karm Farrugia
On the issue of whether, in his view, the ECB should reduce interest rates further than the current 2.5 per cent, veteran economist Karm Farrugia told Business Today: “I certainly do.
“And by no less than a full point, that is 1 per cent. Even by 1.5 per cent,” he insisted.
Asked by Business Today to elaborate on the effects on the Eurozone economy, which was still facing a recession, if the ECB did not cut its interest rates now, especially in countries like France, Germany and Italy, the veteran economist did not mince his words.
“If interest rates are kept as high as now, the recession will intensify. For sure,” Farrugia warned. “Why should the ECB have different views from everyone else?”

He explained that interest rates alone won’t solve the recessionary problem, “but without their reduction to their lowest possible level short of ‘deflationary-risk level’ – even as low as 0.25 per cent – other measures, especially fiscal, would be nigh ineffective,” the veteran economist told Business Today.
On the issue of when the ECB should affect another interest cut if not now, Karm Farrugia reiterated his position that there should be a 1 per cent interest cut now “and next week by another 0.5 per cent”.
“It has no choice really, even if the euro has recently been losing ground against the US Dollar. How can one still expect to enhance and encourage much-needed investment otherwise?” Farrugia told Business Today.

Putting a figure would seem like playing tombola - Lawrence Zammit
“The ECB should reduce the rates further because the rate of inflation in the euro zone is steadily decreasing,” economist Lawrence Zammit commented.
“Moreover, with the price of fuel at nearly one-third of the levels we had six months ago, there is so far little fear of inflation rising again, more so because business and consumer sentiment remain weak,” he explained.
Zammit said there was “an urgent need” for consumers and businesses to increase their spending. “A lower interest rate would encourage investment and would serve as a disincentive for saving,” he told Business Today.
“Governments would otherwise have to make use of fiscal policy to stimulate economic growth— a luxury that some governments in the euro zone can ill afford,” Zammit warned.
However, Zammit would not answer specifically when questioned as to the extent of the ECB rate cut. “I do not have the type of economic data that the ECB would have. So putting a figure to your question would seem like playing a game of tombola,” he told Business Today.
On the issue of whether the ECB would actually cut its interest rate or not tomorrow or not, and the reasons why, Zammit told Business Today: “I think it will because there is the expectation across the international economy for everyone to do his bit.
However, Zammit warned that an interest rate cut was “not enough. The governments of the Euro zone together with the ECB need to adopt the appropriate policies to generate confidence,” he told Business Today.
“It is useless having more money in people’s pockets but then people are unwilling to spend it. Something needs to be done urgently to have a gentle and gradual easing of the credit crunch,” Zammit insisted.

Proceed cautiously - Lino Spiteri
On his part, former Finance Minister and economist Lino Spiteri explained how other major central banks were “cutting interest rates to the bone. To have any chance of being effective, action has to be concerted,” he told Business Today.
On the issue of the extent of the interest rate cut, Spiteri explained how “that depends on its reading of the situation. I would proceed cautiously, at half a percentage points at a time,” the former Labour Finance Minister insisted.
Spiteri warned about the effects on the Eurozone economy, which was still facing a recession, if the ECB did not cut its interest rates on Thursday, especially in countries like the France, Italy and Germany.
“The effect would be an absence of a necessary measure, which could delay recovery from the recession,” Spiteri told Business Today.
Finally, asked whether the ECB would actually cut its interest rate tomorrow, and the reasons why, the former Labour Finance Minister said: “I think it will, under pressure from the market because confidence is still low.”

[email protected]



Other News

More Internet Cable incidents likely to happen in Mediterranean

MIDI €30m bond issue oversubscribed

Chris Paris named GHRC CEO

Financial services: Commission launches consultation on review of Prospectus Directive

New First Vice President joins the marketing team of FIMBank PLC

ECB interest rate decision tomorrow

Getting your hands on EU money

BOV migrates all Gold and Platinum Credit Cards to Chip and PIN technology

PKF International moves up to 11th in IAB world survey

Insight Investment Achieves British Standards Institute Security Certification

Prime Minister presented with Principles of Maltese Taxation publication

Germany to ban excessive public borrowing in Constitution

2008: Annus horribilis





14 January 2009

Collaborating partners:

Malta Today



Copyright © MediaToday Co. Ltd, Vjal ir-Rihan, San Gwann SGN 07, Malta, Europe Tel. ++356 21382741, Fax: ++356 21385075
Managing Editor: Saviour Balzan