European Central Bank signals action--maybe even a rate cut--at October 6 meeting

09/23/2011 3:03 pm EST


Jim Jubak

Founder and Editor,

Apparently even the European Central Bank will get the message eventually. With pretty much every government in the world pounding on the Europeans to do more to address the euro debt crisis, the European Central Bank has started to signal that it will do something at its October 6 meeting.

Steps under discussion, Austria and Belgium’s members on the bank’s government council have told Bloomberg, include the reintroduction of 12-month loans to banks and a cut in the bank’s benchmark interest rate.

The bank introduced 12-month loans to banks in the wake of the 2008 financial crisis but ended them in December 2009. With European banks finding it tough to borrow funds in the financial markets, a move to let banks borrow for a longer period would ease investor worry about the liquidity of the sector. Recently the European Central Bank reintroduced a six-month loan.

And it looks like the central will roll back one of its two interest rate increases of 2011. The bank’s moves to increase interest rates while EuroZone economies were struggling—and while economies in Greece, Portugal, Ireland, Spain, and Italy were actually contracting—has turned out to be--how should I put it--wrong. And after months of denial and defenses that hinged on fighting inflation that no one outside of Germany thought was a danger (German council member Jens Weidmann recently called a new recession “unlikely” and said that the current global economic situation is better than sentiment implies—which is not saying much since current sentiment predicts that the earth will spiral into the sun next week) the bank has signaled that it might try to stimulate growth in Europe by cutting rates from their current 1.5% level to 1.25%. Benchmark rates in Japan and the United States are effectively 0% and in the United Kingdom 0.5%.

A move by the European Central Bank has become more pressing as European governments have continued to drag their feet on approving July’s agreement to expand the powers of the European Financial Stability Facility so the $600 billion fund can buy Italian, Spanish, and other troubled European government bonds. The schedule was to have the facility up and running by October or November. But since it will take six to eight weeks after ratification for the fund to actually go into operation and since only seven of the EuroZone’s 17 governments have so far ratified the agreement that would seem unlikely.

And until the European Financial Stability Facility is up and running, the European Central Bank, like it or not, is the only player in the game.

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