Rate cut expected at today’s ECB meeting

The European Central Bank’s governing council gathered in Bratislava last night ahead of today’s widely anticipated rate-setting meeting, as intensive criticism of Europe’s economic response to the crisis continued.

The governing council of the European Central Bank meets amid heightened expectation that a cut in interest rates could be in the offing. While analysts remain divided on the probability of a rate cut, a swathe of economic figures published this week has bolstered the case for monetary intervention.

One in four jobless
Unemployment reached a new high last month, according to figures published on Tuesday, with more than one in four people in the euro zone now out of work. Business sentiment in the zone also fell in April, while inflation dropped to 1.2 per cent, the lowest in three years and well below the ECB's 2 per cent ceiling.

Data from China and the US yesterday also increased concern about the state of the global economy. A key barometer of manufacturing activity in the US dipped to 50.7 from 51.3 the previous month, and growth in Chinese manufacturing activity also slowed last month. While the benchmark interest rate for the euro area is at a record low of 0.75 per cent, it is still one of the highest among central banks.

ECB president Mario Draghi, who last month said the ECB remains "accommodative" and "stands ready to act" if required, could also announce so-called "non-standard measures". These may include a move to ease the conditions at which banks borrow from the central bank to stimulate lending in the euro zone, or a change to the collateral requirements for loans to SMEs.

Necessary tools
Speaking in April, Mr Draghi said the bank was looking at various non-standard instruments and tools, taking account of what has worked in other countries.

Today’s meeting – one of two governing council gatherings held outside Frankfurt each year – is the first since the euro zone’s fiscal consolidation policy has come under scrutiny.

Spurred by comments from European Commission president José Manuel Barroso last week which suggested that austerity may have reached its limits, euro-zone policymakers have been forced to defend their policy response to the economic crisis, amid worsening economic data.

Growth policies
Newly elected Italian prime minister Enrico Letta also entered the debate this week, using his first speech in parliament to call for growth policies. He meets Mr Barroso in Brussels this morning for talks, following meetings with German chancellor Angela Merkel and French president François Hollande this week.

While analysts remain divided on the prospect of an interest rate cut, ECB executive board member Jörg Asmussen last week was cautious.

“One should be aware that the effectiveness of a rate cut is limited because the transmission mechanism is impaired in parts of the currency area,” he said, referring to the process by which ECB interest rate changes are translated into real interest rate changes for customers.