Rate hikes shelved as ECB battles debt crisis

Rate hikes shelved as ECB battles debt crisis

Last Updated: Sun, Sep 04, 2011 09:45 hrs
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Frankfurt, Sep 4 (AFP) The European Central Bank is likely to signal a halt to its rate hike cycle at its meeting on Thursday, economists said, as the debt crisis undercuts growth in the 17-country eurozone.

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Following two controversial rate increases in April and July, some even expect a reversal in policy with interest rate cuts in the coming months, after core economies France and Germany reported a sharp slowdown in growth.

"With inflation risks probably no longer deemed on the upside, the chances of further interest rate hikes have evaporated and a reversal of earlier increases now seems likely," said Jennifer McKeown at Capital Economics.

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Markets will be looking closely at revised inflation and growth forecasts published on Thursday, with both indicators expected to be pushed lower as the debt crisis rages, opening the door to potential rate cuts.

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"We expect the ECB to shave its growth forecasts modestly and to make a more meaningful revision to its inflation forecast when the bank presents new staff projections," said Berenberg Bank chief economist Holger Schmieding.

Other analysts believe however that the ECB will keep rates on hold for the foreseeable future, if only for consistency's sake.

"Unless the growth and inflation outlook deteriorates markedly, there is no reason to expect that the ECB might reverse its hikes and send the key rate back to its historical low of 1%," said Michael Schubert from Commerzbank.

In London, the Bank of England also meets Thursday but economists expect no no change there from its record low lending rate of 0.50% as the country grapples with the effects of a global slowdown.

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