Deteriorating outlook expected to force cut by central bank
Suspense -- it's one thing the European Central Bank dislikes almost as much as inflation.
While emphasizing that they never "pre-commit" to a policy move, ECB officials usually offer relatively easy-to-read signals on future rate moves. Not this time.
ECB President Jean-Claude Trichet and fellow members of the central bank's rate-setting Governing Council meet in Frankfurt this week under a cloud of uncertainty.
After slashing the ECB's key lending rate by an unprecedented 75 basis points, or three-quarters of a percentage point, to 2.5% in December, Trichet signaled that the ECB might be content to stand pat in January to reflect on the impact of 175 basis points worth of cumulative rate cuts since October.
An unrelenting stream of dire economic data, however, likely won't afford the ECB the luxury of caution, most economists say. A majority expect the ECB to cut its key rate by a further 50 basis points to 2%, surveys show
"Anything less would be a disappointment and nothing more than postponing the inevitable," said Soren Dijohn, senior analyst at Danske Bank in Copenhagen. "We project they will lower rates to 1.5% before the end" of the first quarter.
The ECB is scheduled to announce the rate decision at 7:45 a.m. Eastern time Thursday. Trichet's monthly news conference follows at 8:30 a.m. Eastern.
In his December news conference, Trichet wouldn't say whether the decision to cut rates by 75 basis points was unanimous.
Later in the month he told reporters that policy makers felt there was a "limit to the decrease in rates."
Other ECB officials, meanwhile, have offered contrasting views on the scope for further rate reductions.
But most economists say that signs the euro-zone economy contracted sharply in the fourth quarter and is likely to shrink further in 2009, along with quickly dissipating inflation pressures, will leave the ECB few excuses not to cut again on Thursday.
"A pause was data-contingent and the data have weakened sharply since [December]," said Mark Wall, an economist at Deutsche Bank, which abandoned its earlier prediction of no change to forecast a half-point cut.
How bad have the numbers been?
Industrial production data from November reflect a euro-zone manufacturing sector under severe pressure, economists say.
Although individual country data had signaled an even steeper monthly fall, a 1.6% decline in November euro-zone industrial production reported by the statistical agency Eurostat on Wednesday underscores the sector's slide, said Marco Valli, an economist at UniCredit MIB in Milan.
Indeed, even assuming flat industrial output in December, fourth-quarter production is set to show a contraction of 3.6% -- the weakest quarterly output since the current statistical series began in 1975, said economists at Barclays Capital.
Valli said the data point to a fourth-quarter contraction in GDP of 1.5%. The economy shrank by 0.2% in the second and third quarters.
That's not all. Euro-zone consumer and business confidence gauges fell to record lows in December, a closely-watched purchasing managers index for the manufacturing sector showed activity shrank at its fastest pace since the survey began in 1998, noted Howard Archer, chief European economist at IHS Global Insight.
