Deutsche Joins HSBC, JPMorgan in Postponing ECB Rate-Cut Calls
Deutsche Bank AG, Germany's largest bank, joined HSBC Securities and JPMorgan Chase & Co. in pushing back its prediction for when the European Central Bank will start lowering interest rates.
Deutsche, HSBC and JPMorgan economists put aside signs this week that economic growth in the 15-nation euro area is slowing to forecast that the strongest inflation in almost 16 years will force the ECB's Governing Council to keep the benchmark rate at 4 percent beyond this quarter.
“A sharper than expected rise in headline inflation and signs of continuing, albeit moderate, growth have induced members of the Governing Council to step up their anti-inflation rhetoric,'' Thomas Mayer, Deutsche's London-based chief European economist, said in a report to clients late yesterday.
Mayer said the Frankfurt-based central bank will start paring borrowing costs in the fourth quarter, having previously projected it would begin doing so by the end of September. HSBC economists including Astrid Schilo and counterparts at JPMorgan under David Mackie said yesterday they now expect rate cuts to begin in the final three months of the year rather than in June.
Inflation, which the ECB aims to keep just below 2 percent, accelerated to 3.6 percent in March, as food and energy prices climbed to records. ECB President Jean-Claude Trichet said April 24 that the current rate level of interest rates will help achieve price stability, while council members including Germany's Axel Weber and Juergen Stark have suggested the ECB's current rate may not be high enough to restrain prices.
“Headline inflation rates climbed well above levels expected just a few months ago,'' Schilo said in a report. “We now see inflation above 3 percent until the end of the third quarter.''
Not Following the Fed
Bank of America Corp. also revised its forecast yesterday to show the ECB's first cut in October rather than September. Economist Gilles Moec said there's a “sizeable risk'' that the bank will wait until December.
The ECB has refused to follow the Federal Reserve, Bank of Canada and Bank of England in lowering interest rates, choosing instead to keep its main rate unchanged since last June as it assesses the impact of the financial market turmoil and the resulting increase in credit costs on the economy 1500 payday loans.
Still, data this week showed the economy may be beginning to feel the bite of tighter credit, a record euro and soaring commodity prices. Business confidence in Germany and France, which account for about half the region's economy, slumped in April, while unemployment in Spain, once an engine of European job creation, rose the most in 15 years in the first quarter.
Euro Retreat
Having passed $1.60 for the first time this week, the euro touched a three-week low against the dollar yesterday after the ECB reported money-supply growth, a gauge of future inflation, slowed last month more than economists forecast.
Mackie, chief European economist at JPMorgan in London, told clients that inflation is “keeping the ECB on hold even as growth downshifts to sub-par pace.'' He moved his forecast for quarter- point reductions from the ECB in June and September to November and February.
Unicredit MIB on April 22 said it expects the central bank to begin cutting interest rates in December, having previously forecast a June reduction.
HSBC's Schilo said the longer the ECB keeps interest rates on hold, the greater the chance that the economy will slow more than previously anticipated. HSBC currently forecasts euro-area economic growth of 1.4 percent this year and 1.3 percent in 2009.
“Growth will soften in the quarters ahead'' and “the weakness will persist into 2009,'' Schilo said. “A consequence of this delayed policy response is that we might have to scale down our growth expectations for 2009.''
Forecasts that the ECB will delay reducing rates came at the end of a week which began with the International Monetary Fund predicting the ECB would act within six months. The ECB needs to reduce borrowing costs as soon as commodity prices start to fall, “not into 2009, but in the next three, six months,'' IMF Europe Director Michael Deppler said in a Bloomberg Television interview.
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