FRANKFURT (MNI) – A tentative recovery in Eurozone economic morale
and the latest comments from Governing Council members suggest that the
European Central Bank may well keep interest rates on hold next
Thursday.

Contrary to most forecasts, Eurozone economic morale recovered in
November, according to the European Commission sentiment report
published Thursday. Improvement in services, retail and especially
industry offset an erosion in consumer and construction sentiment.

The upside surprise on the Commission’s sentiment index followed an
unexpected stabilization of French consumer sentiment, a stabilisation
of Belgian business morale as well as the surprise recovery of Germany’s
key IFO indicator for business morale.

Business confidence in Germany defied expectations of a renewed
downturn in November as both the assessment of current conditions and
business expectations for the coming six months recovered, the Ifo
institute reported last Friday. The index rose to 101.4 from 100.0 in
October.

Also on Friday, November’s Belgian business sentiment – a
bellwether for the Eurozone – showed overall confidence may have begun
to stabilize. The index stood at -13.5 in November after -13.4 the
previous month.

While the European Central Bank staff projections for growth will
almost certainly be revised downwards from September’s mid-point GDP
forecasts of -0.4% for 2012 and +0.5% for 2013, tentative signs of
stabilization may suggest less urgency for a refi cut next week.

ECB President Mario Draghi noted twice in his press conference
earlier this month that the easing of financial market tensions after
the ECB’s announcement of the OMT bond buy program was in itself
equivalent to additional monetary accommodation. The latest
stabilisation of economic morale in the Eurozone may give the Council an
opportunity to hold off and see what effect this OMT-driven easing may
have on the real economy.

Governing Council member Ardo Hansson told MNI on Monday that the
central bank’s overall “growth outlook remains intact,” suggesting no
immediate urgency to cut rates. Hansson said that “barring any big
developments,” the baseline scenario remains “sluggish, lightly negative
this year, and sluggish, lightly positive next year.”

Council members are doubtful that a mere 25 basis point cut in the
refinancing rate would do much to help the Eurozone’s economy. Both
Hansson and fellow Governing Council member Panicos Demetriades told MNI
last week that such a cut remains an option that could help, but they
conceded the impact might be limited.

“Where interest rates are now – especially given the impairment of
the monetary transmission mechanism – the impact of a further reduction
is not likely to be large,” Demetriades said. While the ECB’s July rate
cut had not been “without impact,” Hansson said “it would be better if
the monetary transmission mechanism was working a bit better for us.”

Comments from Hansson also suggest that the Governing Council may
yet not be ready for the more aggressive move of taking the deposit rate
down into negative territory of -0.25 basis points along with a cut of
the main refinancing rates.

“Negative deposit rates is a direction many central banks are
possibly considering. Some central banks have already implemented them.
We want to understand their impact a bit more,” Hansson said. “Negative
rates are a question of if and when.”

The latest economic data may just have given the ECB more time to
study its options for 2013.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@mni-news.com

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