European Central Bank president, Jean-Claude Trichet, will be chairing his last interest-rate setting meeting today, before handing over the reins to current Governor of the Bank of Italy, Mario Draghi on November 1.
Today’s monetary policy meeting is held at the height of a euro zone debt crisis. With the 17-country region on the brink of recession, the ECB could announce an interest rate cut though many believe rates will remain unchanged at the current 1.50 percent. There has been some speculation recently of a 25 basis point reduction.
The ECB is more likely to announce plans for helping European banks with new credit in order to prevent a liquidity squeeze in the banking system.
Many European banks with large exposure to Greek debt are at risk of collapse. This week Franco-Belgian bank Dexia was set to become the first European bank to fall victim to the euro zone debt crisis. Tensions in financial markets have heightened this week on concerns that the debt crisis will infect the banking system as it did in 2008.
The uncertainty in the banking system means banks are unwilling to lend, and are reducing lending to each other for fear of not getting paid back. That could hurt the real economy by limiting the flow of loans to businesses and households, as happened in 2008.
Economists think that to avoid such a lending squeeze, the ECB’s 23-member governing council could announce new credit offerings to banks, such as unlimited amounts of six-month or one-year loans.
Experts don’t rule out an interest rate cut to stimulate growth, but consider it less likely as inflation is still uncomfortably high.