Europe Economy

Economists Plead for Lower Euro Rates

Lianna Brinded|Special to

The European Central Bank Shadow Council said it saw no need to set an interest rate floor at 1 percent, smashing official ECB proposals to prevent the rate from reaching 0 percent.

The council, which was founded in 2002, is an independent panel of European economists who make their own recommendations, based on the ECB's long-term economic objectives as defined in the EU Treaty.

In a meeting held Thursday night, its 15 members favored by a majority lowering the ECB's refinancing rate below 1 percent.

Their recommendation comes before a meeting by the ECB's governing council next Thursday to decide on monetary policy. ECB President Jean-Claude Trichet has said unconventional policy measures may be announced after the May meeting.

Of the 15 members, one argued in favor of a cut by 100 basis points to 0.25 percent, five were in favor of a cut by 75 basis points and seven in favor of a cut by 50 basis points. The remaining two members advocated a cut of 25 basis points to 1 percent.

"If the ECB were to drive down rates to rock-bottom levels, then, since we are seeing improvement in the money markets, it may not be necessary for the ECB to undertake quantitative easing", Julian Callow, chief European economist at Barclays Capital, said.

Only two members sided with ECB officials, who have recently stressed that the 1 percent floor was there in order to preserve the functioning of the money market.

"Lowering the refinancing rate below 1% would cause difficulties as the spread between this rate and the deposit rate would shrink too much. This would make it less costly for banks to park liquidity with the ECB," said Jörg Krämer, Chief Economist at Commerzbank.

Growth, Inflation Prospects

The Shadow Council members also delivered some dire data forecasts for 2009.

Growth prospects and inflation forecasts continued into a precipitous decline, where nine members lowered their GDP forecasts on average from -3.3 percent to -3.7 percent. Disinflation forecasts were also lowered by 0.1 percent from 0.4 percent.

"The growth outlook is still deteriorating, albeit at a slower pace, and we are probably facing rapid further tightening of credit conditions," said Marco Annunziata, European Chief Economist of Unicredit.

Shadow council members also projected that real GDP next year would grow at a small rate of 0.4 percent, while inflation will hover around 1.2 percent, on the assumption that the ECB will lower its policy rate to 1 percent.