Inquiring minds are reading ECB Likely to Make Moderate Rate Cut.

European Central Bank governing council member Guy Quaden said the bank will probably cut its benchmark interest rate by a “moderate” amount next month.

“A new cut for our main interest rate is surely not excluded,” Quaden told reporters in Washington today. “It will probably be moderate, but it would bring our main rate to a new historically low level. We will also discuss and probably decide other non-conventional measures.”

Bank of Italy Governor Mario Draghi said today that there is now a “long list of indicators that are less ugly.” Bank of France Governor Christian Noyer said confidence was improving and consumption was holding up “quite well,” while colleague Ewald Nowotny of Austria said he sees positive signs and high uncertainty in the economy.

Both Draghi and Quaden said deflation was a risk to the economy. Nowotny said while the ECB expected prices to shrink for some months, they will rise over this year and next.

We, as the ECB, don’t speak of deflation but disinflation,” Nowotny said in Washington. “At the moment, we have certainly the need for an expansionary policy.”

Like the wizards in Harry Potter afraid to say “Voldemort” the dark lord’s name, the ECB is afraid to speak of deflation. Whether they are willing to speak of deflation or not, it has arrived.

ECB Options to Fight Recession Include Rate Floor

ECB Governor Nout Wellink says ECB Options to Fight Recession Include Rate Floor.

The European Central Bank is considering several options including a floor for its benchmark interest rate to fight the recession, said Nout Wellink, a member of its governing council.

The ECB’s 22 council members appear split over how to counter the worst economic slump since World War II, at a time when the bank’s main rate is already at a record low of 1.25 percent. Germany’s Axel Weber has said the bank shouldn’t cut the rate below 1 percent. Others, including Athanasios Orphanides of Greece, want to keep open the option of deeper rate reductions and have argued in favor of asset purchases.

The Federal Reserve and Bank of England have already cut lending rates close to zero and are buying government and corporate debt to bolster their economies. The Bank of Canada this week cut its key rate to 0.25 percent and said it plans to leave it there for more than a year.

Trichet Signals

While ECB President Jean-Claude Trichet has signaled another quarter point reduction in the main lending rate is likely next month, he has declined to comment on what new tools the bank will adopt. He said in Washington on April 24 that growth was unlikely to return “rapidly.”

A negative inflation rate by itself is not a problem, on the contrary it increases real disposable income,” Wellink said. “The lower and the longer the disinflationary process is, the greater of course the chance that in a certain moment people are going to react in a way we don’t want them to react. That is at this very moment not an issue.

Inflation hawk Trichet signals things are much worse than anyone suspects by suggesting growth is unlikely to return “rapidly.” Moreover, Wellink, like Nowotny just cannot bring himself to say the dreaded D word, confirming the ECB’s Lord Voldemort policy on deflation.

Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List