Still stuck on central-bank life support

Sun Apr 28, 2013 3:07pm EDT
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - Five years after the onset of the global financial crisis, the world economy is in such a chronic condition that the European Central Bank might cut interest rates this week and the Federal Reserve is likely to indicate no let-up in the stimulus it is providing the U.S. economy.

With the euro zone economy in recession, momentum is building for the ECB to lower interest rates for the first time since July 2012, according to senior sources involved in the deliberations.

If the bank does not act on Thursday, a quarter-point cut in June is considered a racing certainty.

The ECB is the most conservative of the world's main central banks. Its main short-term rate, now at 0.75 percent, is higher than the equivalent rate of the Fed, the Bank of England and the Bank of Japan. And unlike its peers the ECB has not engaged in quantitative easing - printing new money to buy bonds.

But the ECB seems to be softening. "I would argue that the ECB should be thinking of easing policy; whether they are currently is more debatable," said Stephen King, global chief economist for HSBC in London.

Only a small majority of 76 economists polled by Reuters expected a cut as early as this week.

The swing factor for King is what is happening to Germany, the euro zone's largest economy. Until recently, Germany had been showing resilience thanks to its export sector. But April's survey of purchasing managers and the Munich IFO institute's monthly poll were distinctly soft.

"Germany is becoming more like everybody else. It is being dragged down, whether it likes it or not, through weakness in southern Europe, slowing growth in China and the depreciation of the Japanese yen," he said.   Continued...

A woman walks past a closed down business in Madrid March 27, 2013. REUTERS/Juan Medina