BLBG: ECB Will Cut Rates as Low as 1.25%, Yen to Rise
The European Central Bank is likely to eventually cut interest rates as low as 1.25 percent as it seeks to stimulate the region’s faltering economy, according to Barclays Capital, a unit of Britain’s second-biggest lender.
Slowing inflation and expectations the European economy will contract will prompt the central bank to add to its 1.75 percentage-point reduction in borrowing costs since October, said Yoshio Takahashi, head strategist for non-Japanese debt at Barclays Capital. The ECB is likely to reduce its 2.5 percent target rate to 2 percent at a meeting tomorrow, according to the median estimate of economists surveyed by Bloomberg News.
“The downside risk to the economy is large and reductions in interest rates may prove to be insufficient to boost the economy,” Tokyo-based Takahashi said. However “a zero interest-rate policy will be difficult.”
The European economy probably shrank 0.3 percent in the three months ended Dec. 31, according to another Bloomberg survey. The region’s economy will probably keep shrinking through 2009, the survey shows.
As the global financial crisis damps European economic growth, slowing inflation may make it easier for the central bank to cut rates. Europe’s inflation may have slowed to the least since October 2006 last month, according to a Bloomberg survey before the statistics office report tomorrow. The ECB raised its benchmark to a seven-year high of 4.25 percent in July, citing concern inflation will quicken.
Sustainable Growth
ECB Governing Council member Erkki Liikanen said yesterday keeping price expectations in check is necessary for sustainable economic growth.
It is “important to stabilize price expectations,” Liikanen said in Helsinki during a Bank of Finland panel discussion on the euro. “It’s a prerequisite for sustainable growth and recovery of employment.”
The yen is likely to strengthen to as high as 70 per dollar in as soon as three months, according to Toru Umemoto, chief currency analyst in Tokyo at Barclays.
The reversal of the so-called yen carry trade as the Federal Reserve seeks to flood the world’s biggest economy with cash will support Japan’s currency, Umemoto said. Carry trades are where investors get funds in a country with low borrowing costs, such as Japan, and invest in another with higher interest rates, aiming to make a profit on the difference. The risk is currency market moves erase those gains.
Other yen positive factors include President-Elect Barack Obama’s protectionist policies, the caution surrounding the euro and the emergence of geopolitical risk, Umemoto said.
13-Year High
The yen reached a 13-year high of 87.14 per dollar on Dec. 17, according to data compiled by Bloomberg. Japan’s currency last traded at 89.72 versus the dollar.
The Fed is likely to keep interest rates at 0.25 percent at its meeting this month, according to a Bloomberg survey. A separate survey shows economists expect the Japanese central bank to also keep rates on hold at 0.1 percent.
Investors should to take “long positions” in Japan’s government bonds, said Chotaro Morita, head of fixed-income strategy research at Barclays, referring to a bet that the securities will gain.
“Yields are likely to remain low on speculation U.S. and Japanese interest rates will remain near zero for a long time,” Tokyo-based Morita said.
The yield on Japan’s 10-year bonds rose two basis points to 1.26 percent today, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. A basis point is 0.01 percentage point.
