ECB likely to keep rates on hold at next meeting

Updated 07 January 2013

ECB likely to keep rates on hold at next meeting

FRANKFURT: The European Central Bank will usher in 2013 with steady interest rates at its first policy meeting this year to keep up the pressure on governments to solve the debt crisis, analysts predict.
With ECB interest rates currently at record lows and its latest anti-crisis weapon ready and primed for action, central bank chief Mario Draghi will not pass up the opportunity to insist once again that only governments can resolve the long-running crisis, economists said.
"Whilst a (rate) cut cannot be entirely ruled out, we do not expect the governing council to change interest rates at its meeting on Thursday," said Commerzbank economist Michael Schubert.
"On the one hand, ECB executive board members have tried to dampen rate cut speculation over recent weeks, and on the other, important sentiment indicators have increased once again," he said.
On Friday, the closely watched Purchasing Managers Index or PMI for the entire euro area hit a nine-month high, offering hope the single currency area could be moving out of its deep double-dip recession.
Recent data for Germany, Europe's biggest economy, have also come in better than expected.
And German Finance Minister Wolfgang Schaeuble even went so far as to say he believed the embattled euro zone was now past the peak of its three-year-long debt crisis.
Market tensions have indeed eased since the ECB unveiled its anti-crisis bazooka in September, the so-called OMT bond-purchase program.
The scheme is credited with marking a turning point in financial market sentiment toward the crisis-wracked euro even though it has not actually been used.
With markets now calmer, the ECB has been able to keep its gunpowder dry, keeping interest rates at their all-time low of 0.75 percent and holding fire on other emergency anti-crisis measures as well, after pumping vast amounts of liquidity into the markets at the beginning of last year.
Nevertheless, at last month's meeting, ECB chief Draghi appeared to open the door to further rate cuts, crucially revealing that there had been "wide discussion" of such a move on the decision-making governing council and that the decision to keep rates on hold was anything but unanimous.
Commerzbank's Schubert pointed out, however, that top board members — such as Yves Mersch, Peter Praet and Joerg Asmussen — have all sought to play down possible rate cuts recently.
Deka Bank chief economist Ulrich Kater was similarly convinced that Draghi would not announce any monetary easing at his first press conference of the year.
"The policy of low interest rates is finally making itself felt in the periphery countries, thereby taking the pressure off the monetary policy actors to come up with new stimulus measures," he said.
"For the time being, there is no immediate need to act," he said.
In the United States, the US Federal Reserve hinted last week that its own huge program of stimulus measures was under review and could be brought to an end sometime this year.
Capital Economics economist Jonathan Loynes cautioned, however, that "having prevented catastrophe in 2012 by pledging to do whatever it takes to save the euro, the ECB will have to follow words with actions in 2013".
While Loynes said he was expecting no policy changes to be announced on Thursday, "the pressure for action may soon be irresistible".
Postbank economist Thilo Heidrich said the likelihood of a rate cut was "wide open", but that he was betting on a further quarter-point reduction in the key refi rate to 0.5 percent in the early months of this year and the ECB would keep it there "for some time to come".
Loynes at Capital Economics said that "despite the sizable challenges facing the ECB (in 2013), it appears unlikely that it will take any steps towards meeting them at its meeting in January.
"No doubt Draghi will reaffirm that the ECB is ready to implement OMTs... and he may even show signs of warming to the idea of a cut in interest rates," Loynes said.
"Either way, though, he is likely to keep the onus on governments by stressing once again that the ECB cannot solve the region's debt crisis single-handedly," he concluded.

Is the Dubai economy turning the corner?

Updated 2 min 49 sec ago

Is the Dubai economy turning the corner?

  • Expo 2020 expected to boost GDP
  • Relaxation of residency rules helps real estate

LONDON: Is the Dubai economy finally turning the corner? At least one major international bank thinks so.

It follows a move by the emirate's leadership to reboot an economy that has been hit hard by corporate job losses, the introduction of VAT and a slowing real estate sector.

The UAE’s non-oil economy is likely to “turn a corner” next year with Dubai’s Expo 2020 infrastructure projects, changes to visa rules and increased government spending set to boost growth, according to a Bank of America Merrill Lynch (BofAML) research note.

Abu Dhabi National Oil Company’s (ADNOC) downstream expansion plans are also expected to drive the country’s non-oil GDP growth, said the note compiled by Middle East and North Africa (MENA) economist Jean Michel Saliba.

The Gulf country’s real GDP growth is estimated to rise to 3.5 percent in 2019 from a forecast 2.8 percent increase this year and a 1.9 percent increase in 2017, said the note published on Thursday.

Buoyed by a recovery in oil prices, Abu Dhabi approved a 50 billion dirham ($13.6 billion) three-year stimulus package in early June, which BofAML estimated could add 0.4 percentage points to non-oil GDP growth.

ADNOC’s $45 billion five-year downstream investment plan — revealed in May — is estimated to add a further 1.1 percentage point to the emirate’s non-oil growth, the report said.

The Expo 2020 event in Dubai could drive up GDP growth by 2 percentage points between 2020 and 2021, the report said, by boosting job creation, consumption and tourist numbers.

Given the improvement in oil prices, the cost of Abu Dhabi’s stimulus spending is considered “financeable” by BofAML, while Dubai’s spending plans are said to be “modest.”

Recent structural reforms, including plans to introduce long-term expatriate visas for up to 10 years, could help to boost the UAE’s population and consumer demand, the note said.

“The new UAE long-term and temporary visa system should facilitate retention of white-collar expatriates,” it said.

“As we expect longer-term visas not to be linked to continued employment, this may increase expatriate incentives to acquire property and support real estate demand.”

The UAE announced in May that it would allow 100 percent foreign ownership of UAE companies in specific industries by the end of the year, a move that could give a welcome boost to foreign direct investment in the country.

A new UAE-wide insurance scheme may provide a one-time boost to corporate profits, the note said.

The UAE cabinet approved plans in June for the insurance scheme to replace the previous system whereby employers had to provide a monetary guarantee to cover each of their workforce.

The move is likely to free up capital that companies could choose to sit on or to reinvest, BofAML said.

“Should corporates invest, we estimate this could lead to a one-off 0.1percentage point boost to UAE non-hydrocarbon real GDP growth,” the report said.