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ECB under pressure to further cut rates

Posted by Thenationonlineng.com on 2009/01/04 | Views: 501 |

ECB under pressure to further cut rates


The European Central Bank will begin the new year under pressure to keep cutting interest rates after retail sales fell for a seventh successive month and loans to households and companies grew at the slowest pace in four years.

The European Central Bank will begin the new year under pressure to keep cutting interest rates after retail sales fell for a seventh successive month and loans to households and companies grew at the slowest pace in four years.

Retailers reported sales, jobs and profit margins all contracted this month as the deepening recession curbed consumer confidence and spending, the Bloomberg purchasing managers’ index showed.

Tighter credit standards at banks meant private sector lending slowed for an 11th month in November, rising 7.1 percent after a 7.8 percent increase in October, the ECB said.

The deteriorations mean the 15-nation euro area will mark a decade of the single currency on Jan. 1 facing a deepening recession. That leaves investors betting the ECB will reduce interest rates as early as next month even as its officials signal a reluctance to do so after cutting their benchmark by 175 basis points to 2.5 percent since early October.

"The ECB will have to go further," said Gilles Moec, an economist at Bank of America Corp. in London and a former Bank of France official. The euro region faces "a severe and protracted recession."

The measure of retail sales in the euro area rose to 41.4 in December from 40.6 in November, remaining below the 50 limit that indicates shrinkage. The Bloomberg index, based on a poll of around 1,000 executives by Markit Economics, also showed that retailers sliced jobs for a ninth month and by the most in four years. Profit margins fell at a record pace.

"Consumer spending going forward will remain as weak as it has been in the last few months," said Nick Kounis, chief European economist at Fortis in Amsterdam.

Money supply (M3), which the ECB uses as a gauge of future inflation, slowed to 7.8 percent from a year earlier as demand for the most liquid assets retreated. Economists had expected the rate to decelerate to 8.5 percent from 8.7 percent in October, according to the median of 28 forecasts in a Bloomberg survey.

"The recent steady downward trend suggests that tighter credit conditions are impacting more," said Howard Archer, chief European economist at Global Insight Inc. in London.

Today’s reports were the latest to suggest the euro-area’s recession deepened this quarter. Consumer confidence fell to a 15- year low in November, while manufacturing and services industries contracted in December at the fastest pace in at least a decade.

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