A majority of European Central Bank policy makers were open to cutting the benchmark rate yesterday and there is a possibility of a reduction early next year if the economy doesn’t pick up, three officials with knowledge of the Governing Council’s deliberations said.
Rates were kept on hold because of concerns about the negative signal a cut might send in conjunction with the significant downward revisions to the ECB’s growth and inflation forecasts, the officials said on condition of anonymity. Lowering rates will be considered again next month, one of the officials said. An ECB spokesman declined to comment on what is discussed in council meetings, which are private.
The euro fell a quarter of a cent on the report to $1.2903.
ECB President Mario Draghi said yesterday that while there was a “wide discussion” about interest rates, “the prevailing consensus was to leave the rates unchanged.” The ECB held its benchmark at a record low of 0.75 percent and kept the deposit rate at zero.
“If the situation doesn’t improve -- and there is a relatively small chance there will be a significant improvement -- it’s possible to expect a move in interest rates next year,” ECB council member Jozef Makuch told reporters in Bratislava today.
‘Principle of Consensus’
Julian Callow, chief international economist at Barclays Plc in London, said the comments support his view that the ECB will cut its benchmark rate in the first quarter of 2013 and increase the chance of it happening as soon as January.
“While the legal situation is that the Governing Council is required to decide on matters by a simple majority, in practice it adheres to the principle of consensus, which means the members try to achieve a common view that reflects their different positions,” Callow wrote in a note to clients. “In this sense, it is possible for a minority to block, or at least delay, a decision in the interest of maintaining a public consensus.”
The sovereign debt crisis, which has pushed at least six of the 17 euro nations into recession, is now curbing growth in its largest economies. The Bundesbank today slashed its forecast for German expansion next year to 0.4 percent from 1.6 percent.
The ECB yesterday forecast that the euro economy will contract 0.3 percent next year, cutting its estimate from 0.5 percent growth projected in September. The central bank also estimated that inflation will slow to 1.6 percent next year and 1.4 percent in 2014, well below its 2 percent limit.
“There are clearly problematic developments in the realm of the real economy,” ECB council member Ewald Nowotny said in Vienna today. The ECB’s forecasts underwent “a dramatic deterioration, a significant downward revision to an extent we rarely see,” he said. “There is a multitude countries that will shrink” this year and next and “that’s a significant challenge.”
Two officials said that because the ECB has not finished analysing the impact of a negative deposit rate, a cut yesterday would have affected only the benchmark.
“Even those who want to cut will have been given some pause for thought by the prospect of a negative deposit rate,” said Christian Schulz, an economist at Berenberg Bank in London. “They are happy to signal that they are ready to cut, but hoping they won’t have to.”