The European Central Bank, after two recent interest rate cuts and a series of unprecedented liquidity measures, will hold its fire this month, as it assesses the impact of those previous measures, analysts have predicted.
The recent raft of economic data, notably in Europe’s economic powerhouse Germany, has been surprisingly positive, so the bank at its meeting today looks set to wait and see how its past moves to prevent a credit crunch and boost the economy in the 17 countries are actually panning out.
In December, the ECB brought euro zone borrowing costs back down to their previous historical low of 1%, effectively reversing last year’s two earlier rate hikes.
On top of that, it offered banks in the region an unlimited pool of liquidity by loosening collateral rules, cutting the minimum reserve ratio and launching new three-year loans at super-cheap rates.
Last month, ECB chief Mario Draghi insisted the liquidity measures were proving effective in tackling the debt crisis. But so far, banks appear to be sitting on the unprecedented €489 billion that the ECB pumped into the system, instead of lending it out to households and businesses as the central bank had hoped.
Banks’ deposits with the ECB’s overnight facility have soared to record highs in recent weeks and, in its latest regular quarterly bank lending survey, the ECB found that banks have tightened credit conditions for both households and businesses even as demand for loans is falling.
Nevertheless, analysts say the data does not fully take into account the ECB’s liquidity measures. At the same time, there has been a raft of better-than-expected economic data recently.
In Germany, the single currency area’s biggest economy, for example, unemployment is at all-time lows, inflation appears to be in check and both household and business confidence is buoyant. That has led to two consecutive monthly rises in the all-important Purchasing Managers’ Index (PMI) for the entire euro zone, a key barometer of sentiment.
The ECB’s new chief economist, Peter Praet, has also recently made it clear that the ECB had already done “very much” and also pointed to the negative side effects of historically low interest rates. Despite this many expect rates to drop to as low as 0.5% by the middle of 2012.