Maltese economists concur on a further reduction to combat recession

A panel of economists asked by Business Today about tomorrow’s European Central Bank (ECB) interest rate decision were in consensus that there was still the need for another rate cut after last month’s decision to slash

ECB interest rate decision tomorrow
Maltese economists concur on a further reduction to combat recession

When asked by this newspaper whether, in their view, the ECB should reduce interest rates further then the current 2.5 per cent, senior economist Edward Scicluna, veteran economist Karm Farrugia, former Labour finance Minister and economist Lino Spiteri and economist Lawrence Zammit were in agreement about a further interest rate cut.

However, there were divergent views on the extent of the cut, ranging from 0.25 per cent proposed by Edward Scicluna to the 1.5 per cent cut suggested by Karm Farrugia.

Governors from the 17 Eurozone meetings will be taking the fateful decision during their monthly meeting at the ECB headquarters in Frankfurt tomorrow morning.

In the previous meeting of the ECB on 4 December 2008, the ECB Governing Council had decreased the main refinancing rate by 0.75 per cent from 3.25 per cent to 2.5 per cent.

The general consensus among international financial analysts was that the ECB should be cutting the interest rate by half a percentage point.

Although equity markets have gained since the start of the New Year and demand for safe-haven government bonds weakened, anything short of a 50 basis point cut to 2 per cent could cause the timid rise in financial market sentiment to recede,” credit rating agency Moody’s said in a note issued last Friday.

The flash estimate for inflation showed price growth slowed to 1.5 per cent in December, below the ECB’s target rate of 2 per cent.

Meanwhile, the composite Purchasing Managers’ Index (PMI) for services and manufacturing fell to 38.2 in December, signaling a contraction in output and activity.

ECB might favour worse off countries – Edward Scicluna

Professor Edward Scicluna told Business Today that there were various economic indicators for the eurozone economy which strongly suggested another cut in the interest rates offered by the ECB.

For instance, in November 2008, the annual rate of growth of the money supply M3 in the euro area decreased to 7.8 per cent from 8.7 per cent in October 2008.

“The three-month average of the annual growth rates of M3 over the period September 2008 to November 2008 decreased to 8.4 per cent from 8.7 per cent in the period August 2008 to October 2008,” Scicluna explained.

“Moreover, euro area annual inflation is expected to be 1.6 per cent in December 2008 according to a flash estimate issued by Eurostat. It was 2.1 per cent in November,” he told Business Today.

In October 2008 compared with September 2008, the euro area industrial new orders index fell by 4.7 per cent. In September the index decreased by 5.4 per cent.

“The first estimate for the euro area trade balance with the rest of the world in October 2008 gave a €+0.9 billion surplus, compared with €+4.2 billion in October 2007,” Scicluna added.

The number of persons employed in the euro area decreased by 0.1 per cent (80,000 persons) in the third quarter of 2008 compared with the previous quarter, according to national accounts estimates published by Eurostat.

“Moreover, total hourly labour costs in the euro area rose by 4.0 per cent in nominal terms in the year up to the third quarter of 2008, compared with 2.8 per cent for the previous quarter,” the senior economist told Business Today.

In October 2008 compared with September 2008, seasonally adjusted industrial production fell by 1.2 per cent in the euro area. In September production decreased by 1.8 per cent.

“Finally, GDP declined by 0.2 per cent in the euro area during the third quarter of 2008, compared with the previous quarter, according to first estimates released by Eurostat. In the second quarter of 2008, the growth rate was -0.2 per cent,” Scicluna said.

“Basing my decision on this economic information, I would recommend to the ECB a 25 basis points cut to the current rate,” the senior economist told Business Today.

Asked for his views on whether or not the ECB would actually cut its interest rate, Scicluna said that if the ECB did not affect an interest rate cut it was “because it might want to give extra weighting to those countries who are not so worse off.

“The development of a schism between the better performing countries led by Germany, and the worse performers such as Greece and Italy, is worrying many economists including the ECB.

“I shudder to think that Malta may soon be listed among these problematic laggards least prepared to weather this international recession,” Scicluna told Business Today.

Wednesday, 14 January 2009 by Charlot Zahra

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