E.C.B. Looks Poised for Action at Thursday Meeting

Mr. Trichet will hold the last press conference of his eight-year term Thursday in Berlin, amid speculation that the bank could cut its benchmark interest rate just three months after raising it.

Some analysts doubt that the E.C.B. will reverse course so quickly, but they are nearly unanimous in thinking that it will need to do something at its monetary policy meeting Thursday in response to deteriorating conditions in the euro zone economy and the banking system.

Recent events have highlighted the bank’s role as the only institution in the euro area with the flexibility and resources to respond quickly to a crisis that seems to grow more acute by the day.

Euro zone governments are struggling to approve a bailout fund in a politically charged process that has focused an improbable amount of international attention on parliamentary debates in Finland and Slovakia. Yet the fund, at a proposed €440 billion, or $585 billion, already appears inadequate for the growing scale of the crisis.

At the same time, fears about European banks seem to be coming true. It has been reported that Dexia, a French and Belgian institution, may break up because of its exposure to Greek debt.

“We are coping with the worst crisis since World War II,” Mr. Trichet said Tuesday during an appearance — his last as E.C.B. president — before the Economic and Monetary Affairs Committee of the European Parliament.

Analysts at Royal Bank of Scotland see a better-than-even chance that the E.C.B. will cut its benchmark rate to 1.25 percent from 1.5 percent Thursday, but they acknowledge that it is not an easy call.

The E.C.B.’s governing council, which includes the central bank chiefs of the 17 members of the euro zone, is divided and has been sending conflicting signals. Earlier this year, Mr. Trichet clearly flagged rate moves in advance.

“When I listen to what the governing council members have said in the last few days, there is no consensus,” said Michael Schubert, an economist in Frankfurt for Commerzbank.

One argument in favor of cutting rates Thursday is that Mr. Trichet will want to do a favor for his successor, Mario Draghi, governor of the Bank of Italy. Mr. Draghi, who will take office Nov. 1, will be under pressure to establish his credentials as an inflation fighter, and he risks undermining his credibility if he oversees a rate cut immediately upon assuming the presidency.

But inflation hard-liners like Jens Weidmann, president of the Bundesbank, are likely to argue vehemently against a rate cut even though evidence is building that Europe is going into a recession. Inflation in the euro area probably rose to an annual rate of 3 percent in September, according to official estimates, well above the E.C.B.’s target of about 2 percent.

The E.C.B. might seek a compromise and take less controversial steps to show it is not watching idly as the banking crisis becomes more acute. It could revive its purchase of secured debt issues by banks, for example, or extend low-interest lending to strapped institutions.

None of those moves will solve the debt crisis, though, nor would a large rate cut, for that matter. But the E.C.B. is very unlikely to take more radical steps, like printing money to buy huge quantities of government bonds, relieving the banks of damaged assets.

Mr. Trichet signaled Tuesday that political leaders should not expect the E.C.B. to rescue them. “We cannot substitute for governments,” he told the parliamentary panel, before going on to mention how much he is looking forward to retirement on the coast of Brittany.

Article source: http://www.nytimes.com/2011/10/05/business/global/ecb-looks-poised-for-action-at-thursday-meeting.html?partner=rss&emc=rss