Reuters: Financial Services and Real Estate: Weak euro zone data firms up f'casts for ECB rate cut

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Weak euro zone data firms up f'casts for ECB rate cut May 24th 2012, 17:09 By Marc Jones FRANKFURT | Thu May 24, 2012 1:09pm EDT FRANKFURT May 24 (Reuters) - Disappointing euro zone data on Thursday saw a host of top banks and economists firm up forecasts for the European Central Bank to cut interest rates below 1 percent for the first time in its history in the next few months. The clouds hanging over the euro zone's already battered economy darkened further on Thursday as data from the bloc's key services and manufacturing sectors came in worse than expected. In response, a swathe of banks altered their ECB interest rate calls and broader economic forecasts, reflecting the belief that the 17-country euro zone is set to suffer a deeper contraction than originally feared. "Like most people I guess the latest sentiment indicators and the threatening situation in Greece have made us reassess our forecasts. The ECB is likely to respond to the deteriorating economic outlook by cutting rates further," said Tobias Blattner, an economist at Daiwa Securities in London. "The only question for us now is whether they cut rates in July, or whether like in November, Draghi surprises us and cuts next month," he added. J.P. Morgan and France's BNP Paribas also strengthened their rate cut expectations. "We have revised our ECB forecast and now expect the refinancing rate to be cut to a new low of 0.5 percent by the end of the third quarter," said BNP's Ken Wattret, predicting a 0.25 percent reduction next month. Citi, which previously expected the ECB to leave its main rate at 1 percent this year, also now sees that rate going down another half a percent by the third quarter. "Our new base case is that Greece will exit the euro. We think that the consequences that that will have will see the ECB do additional LTROs but also cut interest rates to 0.5 percent," said its top euro zone economist, Juergen Michels. "Today's data also confirms the deterioration of the economy and will allow the ECB to go beyond the 1 percent threshold," he added. Rate cut expectations have been on a rollercoaster ride since the start of the year. Rates started the year at a record low 1 percent, but with the debt crisis ongoing most experts were predicting additional cuts until the ECB's move to pump over a trillion euros of ultra cheap funding into the banking system, earned a lull in the troubles. The consensus then - even as recently as last month - was that rates would stay on hold (click ). However the relapse in the crisis and a growing fear that Greece will leave the euro has seen things turn again. (Editing by Hugh Lawson) Link this Share this Digg this Email Reprints

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