Anaemic economic growth will not be the European Central Bank's only concern as it sits down on the ...
Anaemic economic growth will not be the European Central Bank's only concern as it sits down on the 4 September to decide whether to cut rates.
According to Nicolas Sobczak, analyst at Goldman Sachs, it would make little sense to move before 4 September due to a lack of new information. However after the summer recess he says the ECB will have to weigh up several pieces of important economic news.
On 14 August Eurostat will publish its flash estimate of second quarter GDP, which Sobczak says will likely be flat, with some a risk it could show a slight decline.
By 4 September the ECB will also have the July and August Purchasing Managers Index (PMI) readings, which Sobczak says are likely to still remain significantly below 50.
If this is the case the PMI will have been below 50 for three months running following the last rate cut in June ' a time frame Sobczak says is the average waiting period the ECB leaves before cutting rates again.
He adds: 'If the euroland economy develops in the way we anticipate in the next couple of months, there seems little barrier to an interest rate cut by the ECB on 4 September. We also expect a 0.5% cut in official rates to 1.5% by the end of the year.'
Elliott, strategist at JP Morgan Fleming Asset Management, says that although the economic data coming out of the core European countries such as France and Germany would suggest there is room for a cut in rates, the ECB is playing a political game with these countries as it seeks leverage to persuade them to introduce long-term structural reforms. He adds supply-side reforms in the labour market are needed to make European workers more flexible. While social welfare needs to be altered in a similar way to Margaret Thatcher's policies in the UK in the 1980s.
While he says the core countries generally recognise this need for reform, he adds it will not be a vote winner in the elections because it means less job security.
He adds: 'The ECB does not want to be blamed for putting the French and German economies into recession by keeping rates too high for too long but it also does not want to let France and Germany out of a hole by cutting rates.'
A factor in favour of an interest rate cut, says Elliott, is the strength of the euro at present, which is hurting European exporters and helping imports become cheaper. This could result in price deflation, which he adds any central bank would want to avoid.
He says: 'An environment in which the economy is weak and the currency is strong would favour an interest rate cut.'
However if the ECB were to lower interest rates it would not be beneficial for the new countries ready to ascend into the EMU next year, most of which have inflation above the average euro rate.
Elliott says: 'The more interest rates and growth diverge in the euro area, the harder it will for the accession countries to join the euro currency. However I do not think this will be weighing on ECB thinking when it considers cutting rates.'
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