ECB's Weber is against rate cut, says recovery may require increase

Posted Aug 27th 2008 10:55AM by Joseph Lazzaro
Filed under: International Markets, Forecasts, Other Issues, Federal Reserve, Recession

There are lines of reasoning, and then there are lines of reasoning.

European Central Bank board member Axel Weber said Wednesday there's no plan for interest rate cuts and policy makers may, in fact, have to raise rates as the economy accelerates out its slump, Bloomberg News reported. He added that "monetary policy is where it should be" and that "discussion about declining rates in Europe is premature."

Weber's comments occur after Eurostat reported that Europe's economy contracted 0.2% in the second quarter (pdf), amid signs of slowing in business investment and consumer spending, and sagging business confidence.

London-based economist Mark Chandler told BloggingStocks Wednesday that data he's reviewed indicate Europe's economy will continue to slow in Q3, which is why he's somewhat taken aback by Weber's comments.

"Weber's comments are a bit troubling. I mean, what data is he looking at? The comments will create a bit of a row [dispute] in the U.K. because our economy is not going to contribute to the recovery he sees, not at this stage," Chandler said.

"My sense is that [ECB President Jean-Claude] Trichet probably sent Weber out there to begin to talk-down interest rate cuts to lower expectations regarding how much the ECB is willing to cut," Chandler said. "But even in that context, the talk of needing to increase rates is a bit of a farce. It may be a year, or more, before the economy is healthy enough to increase rates." Chandler added that he still expects the ECB to cut interest rates by a quarter-point when it meets next on September 4.

Despite a slowdown that has gripped the United States, the United Kingdom and continental Europe, the ECB has remained in restrictive monetary policy mode -- first increasing its refinance rate by a quarter-point to 4.25% in mid-2008, then taking a stand-pat stance, citing inflation pressures.

Meanwhile, the U.S. Federal Reserve cut interest rates by 325 basis points over the course of a year, to 2% from 5.25%, in an effort to jump-start a U.S. economy dragged down by its worst housing slump in a generation. The Fed has since paused its rate cut cycle.

Monetary Policy Analysis: So much for the guarantee of an ECB interest rate cut early next month. But in this case, the notoriously hawkish Trichet-led ECB may be outdoing itself: the regional slowdown practically mandates an easing of rates in the U.S., England and the E.U., and a failure to do so will prolong and deepen the recession.

Tags: Axel Weber, Bank of England, BOE, ECB, EU, euro zone, European Central Bank, European Union, Fed, interest rates, inthenews, monetary policy, Trichet, U.S. Federal Reserve