ECB and BoE tipped to cut rates
Europe's two leading central banks are expected to cut interest rates on Thursday, but speculation is growing that the ECB & BoE will effectively start printing money to give their ailing economies a kick start.
By Agencies |
LONDON: Europe's two leading central banks are expected to cut interest rates on Thursday, but with the scope for further reductions limited, speculation is growing that the European Central Bank and the Bank of England will effectively start printing money to give their ailing economies a kick start.
Amid increasingly grim economic news, the European and British central banks are tipped to cut their benchmark rates by a half percentage point to new record lows of 1.5 percent and 0.5 percent respectively.
However, markets will be keeping a close eye on statements released alongside the rate announcements on more radical steps such as so-called quantitative easing _ a technical term that describes the technique of expanding the supply of money in the economy.
The Bank of England revealed last month it had sought government approval for quantitative easing and Treasury chief Alistair Darling hinted in an interview published on Tuesday that it could begin increasing the money supply this week.
Economists suggest the central bank could create about 150 bn pounds ($212 bn) of new money.
While the bank may not be physically printing bank notes, it would be increasing the amount of money in the economy by buying assets from banks without borrowing to fund its purchases _ effectively creating new money.
Investec chief economist Philip Shaw said the move ``should in principle encourage the banks to lend to private sector agents such as households and businesses, stoking monetary growth and stimulating activity.''
Whether the tactic will work, however, depends on the extent to which struggling banks pass on the extra funds, instead of hoarding them as reserves.
Quantitative easing is a far more delicate matter for the European Central Bank and may partly explain why the central bank has been less aggressive than its peers, such as the U.S. Federal Reserve as well as the Bank of England, in slashing interest rates down toward zero percent.
One of the main difficulties the European Central Bank faces is how it would select assets to buy within the confines of the 16-nation single currency zone. The bank can't buy government bonds, and even buying assets in one country might open it to accusations of favoritism.
The European bank still has room to cut interest rates further in late spring, by which time there may be some very tentative signs that the global economy is over the worst.
Amid increasingly grim economic news, the European and British central banks are tipped to cut their benchmark rates by a half percentage point to new record lows of 1.5 percent and 0.5 percent respectively.
However, markets will be keeping a close eye on statements released alongside the rate announcements on more radical steps such as so-called quantitative easing _ a technical term that describes the technique of expanding the supply of money in the economy.
The Bank of England revealed last month it had sought government approval for quantitative easing and Treasury chief Alistair Darling hinted in an interview published on Tuesday that it could begin increasing the money supply this week.
Economists suggest the central bank could create about 150 bn pounds ($212 bn) of new money.
While the bank may not be physically printing bank notes, it would be increasing the amount of money in the economy by buying assets from banks without borrowing to fund its purchases _ effectively creating new money.
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Investec chief economist Philip Shaw said the move ``should in principle encourage the banks to lend to private sector agents such as households and businesses, stoking monetary growth and stimulating activity.''
Whether the tactic will work, however, depends on the extent to which struggling banks pass on the extra funds, instead of hoarding them as reserves.
Quantitative easing is a far more delicate matter for the European Central Bank and may partly explain why the central bank has been less aggressive than its peers, such as the U.S. Federal Reserve as well as the Bank of England, in slashing interest rates down toward zero percent.
One of the main difficulties the European Central Bank faces is how it would select assets to buy within the confines of the 16-nation single currency zone. The bank can't buy government bonds, and even buying assets in one country might open it to accusations of favoritism.
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The European bank still has room to cut interest rates further in late spring, by which time there may be some very tentative signs that the global economy is over the worst.
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