The chances of the European Central Bank cutting interest rates later this month have all but disappeared after Eurozone inflation soared to the highest level for almost 16 years.
According to figures published this week, inflation rose from 3.3% in February to 3.5% in March.
The news came as the ECB joined the Bank of Japan in pumping in extra liquidity into the markets of Europe to handle the end of quarter and end of financial year liquidity tightening.
The ECB pumped in 15 billion euros, or upwards of $25 billion.
Economists reckon the inflation news all but rules out any cut in ECB interest rates in the near future, even as economic growth slows.
The bank aims to keep inflation “below but close” to 2%.
But that task is being made harder by the week by the way the credit crunch hangs around, the slowing pace of growth in major economies, such as Spain, Italy, France and parts of Germany (not to mention Britain outside the eurozone) and the way inflation continues to run at very high levels, compared to recent years.
The ECB has argued that there has been no “credit crunch” because eurozone lending to business is accelerating and growing at record rates.
Lending to “non-financial corporations” grew at an annual rate of 14.8% in February – the highest since the launch of the euro in 1999, according to ECB figures.
The central bank says arguments that such data have been distorted by the financial turmoil – as a result, for instance, of banks facing difficulties in selling-on loans and removing them from their balance sheets.
But in Australia we have seen, and the Reserve Bank acknowledges that there has been, reintermediation on a massive scale with businesses going back to banks and looking for money. That has boosted our business lending to an annual growth rate of 24% in January and less than 22% in February as the hectic pace slows.
Economists say businesses have been depositing more with mainstream banks and borrowing more from them, which in turn has boosted overall credit growth.
But the ECB doesn’t see things that way and claims that even if eurozone economic growth has slowed as a result of the euro’s strength, interest rate rises since 2005 and worries about the economy, no dramatic downturn is looming.
That has stopped financial markets from pricing in interest rate cuts before June at the earliest, despite the sweeping cuts in the US by the Fed.
That news came as UBS, the worst hit of Europe’s banks, appears set to look for more than $US13 billion in new capital, on top of a similar amount raised late last year
UBS wants more cash to fill yet another gap in its balance sheet that has been left by a further $US18 billion of sub-prime mortgage-related losses in the first quarter.
The new share issue will come only weeks after UBS agreed a SwFr 13 billion cash injection from GIC, a Singapore Government sovereign wealth fund, and an unnamed Middle Eastern investor.
That was after another $US18 billion loss, relating to the fourth quarter of 2007.
It is that sort of news that worries businesses in Europe. If there is no credit crunch, how come banks and other investors are still bleeding and when they look to the future, see no way of rebuilding fractured balance sheets and portfolios without finding fresh capital. It would seem the banks won’t lend to each other but are lending gaily to businesses, despite slowing levels of activity in some major economies, especially Spain where the housing slump is starting to look ominous.
That is showing up in business sentiment.
The European Commission reported that its eurozone “economic sentiment” indicator fell below its long term average in March; a pointer economists say, to a further slowing in growth in coming months.
The indicator is now at its lowest level since November 2005.
In Spain the gathering housing slump pushed the economic sentiment indicator in March to the lowest level since January 1994. But in Germany there was a rise in optimism in the same month, while sentiment in France remained unchanged.
But German confidence could be an example of the perverse nature of surveys. German inflation rose from 2.9% in February to 3.2% in March. That was the second highest since the current method of measuring price pressures were harmonised across the eurozone in 1996 (the peak was last November).
