Europe’s stalled economy is not expected to get more help today from the European Central Bank.
The ECB is expected to hold off cutting interest rates as it waits for financial markets to heal so that its already low benchmark rates get through to businesses and consumers.
Most analysts say the bank will leave its key refinancing rate at a record low of 0.75% when the 23-member ECB governing council meets at its headquarters in Frankfurt.
The bank decides rates for the 17 European Union countries that use the euro, affecting the finances of 333 million people.
Some experts say the bank may have already pulled all the levers it can to get Europe out of its recession. But the euro zone economy needs help from somewhere.
The ECB has forecast the euro zone economy will shrink 0.3% in 2013, with a gradual recovery kicking in later in the year. Some indicators of business sentiment have risen recently, although they remain at levels indicating the euro zone is still in recession at the start of 2013 – just not shrinking as fast. Unemployment has hit 11.8%, the highest since the euro was introduced in 1999.
The ECB’s key weapon recently has been not interest rates but its offer to buy unlimited amounts of bonds issued by indebted countries, on condition that they tap a European financial aid programme that would demand budget cuts in return. No country has requested that aid so far.
But the mere announcement of the programme pushed borrowing rates down for two of the most troubled governments, Italy and Spain, easing the risk they might be unable to handle their massive debts. The refinancing rate is what banks pay to borrow from the ECB. That in turn should influence how much banks charge businesses and consumers to borrow.
The problem now is that banks which were hurt during the financial crisis are not passing on those lower rates to customers, but charging significantly more to lend money. Under such conditions, another cut to the refinancing rate by the ECB would do little to help the economy.
Bank President Mario Draghi and Yves Mersch, the newest member of the bank’s six-member executive committee, have said that unconventional measures such as the bond purchases offer were doing more to lower borrowing rates in the real economy than a rate cut would.
As the bond-buying offer boosted confidence in financial markets, some banks felt more comfortable charging less for loans. In fact, the bond-buying programme – called Outright Monetary Transactions, or OMT – has been so effective in lowering governments’ high bond market borrowing costs that some economists are now seeing a chance it may not be used for months, if ever.
That is a drastic shift from expectations on September 6, the day the programme was announced. Then, Spain was expected to seek a bailout within weeks.