MIDF Research: Effectiveness of a rate cut by ECB could be limited

Business & Markets 2013
Written by Charlotte Chong of the edgedaily.com
Thursday, 25 April 2013 15:37
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KUALA LUMPUR (APRIL 25): The effectiveness of an interest rate cut
by the European Central Bank (ECB) could be limited, according to
MIDF Research chief economist Anthony Dass.
In a report Thursday, Dass said the ECB was under increasing pressure
to slash its interest rates when it meets next Thursday, said MIDF
Research.
However, he said that the effectiveness of a rate cut could be limited.
“Our argument is that the transmission mechanism is impaired in parts
of the Eurozone area,” he said, adding that the access to financing may
not be the key issue.
“And if our assessment falls true, there is a potential risk of falling into
‘liquidity trap’ cannot be ruled out,” said Dass.
He said some companies in Germany were already enjoying low
borrowing cost, while in contrast companies in Spain and Italy are
unable to benefit from the same financing conditions, especially the
small and medium-sized enterprises.
Dass said low rates in theory encourage borrowing to spend and invest,
stimulating the economy.
“But rates are already low, and we believe the cheap financing is simply
not reaching many companies. That is because troubled banks in some
parts of the eurozone are reluctant to lend,” he said.
Meanwhile, the latest data on the purchasing manager index (PMI) undermined expectations of a recovery envisaged in 2013
when both Germany and euro-zone unveiled weak PMI, said Dass.
“Daimler, a carmaker in Germany, cut its full-year forecast that it issued barely two months ago as profits fell due to weakerthan-
expected European car and truck sales.
“Also, Volkswagen pointed out that its operating profit tumbled 26% in 1Q partly due to slumping demand in Europe,” he said.