The European Central Bank could announce a rate cut of half a percentage point, or 50 basis points, when its Governing Council next meets in Berlin on October 6.
That’ according to economists at RBS, who believe the cut is warranted due to “an acceleration in the deterioration in financial market conditions,” which could snowball into a much more severe crisis. They believe there is a 60% chance that the ECB will trim rates next month — or by November at the very latest — in order to backstop the banking sector.
A rate cut would reduce banks’ funding costs and the economists at RBS felt it was “inconceivable that the ECB would stand by whilst euro area banks came under increased pressure.”
They also expect the ECB to announce additional measures to support the system, such as resuming its Covered Bond Purchase Program.
Such a move could also provide relief to eurozone countries that are struggling to raise funds at a reasonable rate in the market, the economists said. They also suggest that the eurozone region could slip into recession by early 2012.
Pointing to the recent raft of anemic economic data from the region, they expect euro area GDP to contract by 0.2 percent in the fourth quarter from the previous quarter and by an additional 0.4 percent in the first three months of next year.
What’ worse, the economists said they “expect any recovery thereafter to remain extremely modest, as the need for fiscal austerity weights on growth.”