The European Central Bank (ECB) is highly likely to reduce lending rates by 50 basis points (bp) to 0.5% at its July meeting given recent weak economic data‚ say Barclays Research economists Guiseppe Maraffino and Laurent Fransolet.
The ECB’s policy meeting is on July 5.
Barclays Research also expected the central bank to lower the deposit facility to zero despite the possible implications on the liquidity markets.
There is also growing expectation that SA’s own Reserve Bank will reduce lending rates by another 50 basis points before the end of 2012 amid weak economic indicators and continued global uncertainty caused by eurozone sovereign debt developments.
A cut in the deposit facility to zero by the ECB‚ the economists said‚ could lead the monetary policy corridor to narrow to approximately 50bp from about 75bp.
“We do not believe that this is an issue. The corridor approach is not working properly in the current situation of abundant liquidity and differentiation in the liquidity market between core and peripheral banks‚” they said.
Barclays Research also factored in the effect a rate cut would have on investors and capital flows.
“An initial market reaction could be to move along the credit curve‚ in a search for yield pick-up in other countries in the core world. There will likely be some convergence of all rates towards zero‚ even if the lack of enough core paper could push some rates below zero‚” Maraffino and Fransolet suggested. - I-Net Bridge