Rate-setters to be forced into action as economic recovery stalls in eurozone

A heavy blow to the eurozone's fragile recovery hopes yesterday heightened expectations that the European Central Bank will intervene again next month to prop up growth.

The single currency bloc managed economic expansion of 0.2 per cent in the first three months of the year – its fourth successive quarter of growth but just half the 0.4 per cent pace expected by economists. Germany was the star performer with quarterly growth of 0.8 per cent, but even the region's economic powerhouse could not make up for stagnation in France, a dismal 1.4 per cent contraction in the Netherlands and a further 0.1 per cent decline in Italy.

The poor growth figures follow more up-to-date indicators such as Germany's closely watched ZEW index of investor confidence, which sank for the fifth month in a row in May. The European Central Bank's president, Mario Draghi, is also struggling with low inflation, which at 0.7 per cent is well below the central bank's target of close to 2 per cent. Mr Draghi said last week that the ECB was ready to "act swiftly" if the recovery disappointed and inflation remained low.

Options available to rate-setters include cutting the benchmark interest rate from the current record low of 0.25 per cent, in effect charging banks to keep reserves at the ECB through a negative deposit rate, or a credit-boosting initiative similar to the Bank of England's Funding for Lending Scheme. Outright quantitative easing – buying up bonds with newly created money to boost growth – is also a possible option but would remain hugely controversial with Germany the chief opponent to such a move.

Peter Vanden Houte, an economist at ING, said: "Today's figure is a major disappointment, as it suggests that the eurozone is still far away from reaching the escape velocity required for a sustainable recovery. If anything, today's dismal figure should increase the pressure on the ECB to act next month. We believe GDP growth is unlikely to be stronger in Q2 than in Q1.

"This 'recovery' remains far too weak to halt deflationary pressures. Therefore we believe the ECB will follow up its recent dovish rhetoric at next month's policy meeting."

Kristin Forbes: New woman on MPC

A former economic adviser to the Bush White House will become the first woman on the Bank of England's Monetary Policy Committee in four years.

Kristin Forbes, a professor at the Massachusetts Institute of Technology and an expert on financial contagion, was named by the Treasury yesterday as the latest external member. In July she will become the first woman on the MPC since Kate Barker stepped down in 2010. She will, however, be joined by the new deputy governor, Nemat Shafik, in August.

Ms Forbes, 43, previously worked at the World Bank and the US Treasury. She was also the youngest person to serve on the White House's Council of Economic Advisers between 2003 and 2005. George Osborne yesterday described her as "an economist of outstanding ability with real practical experience of policy making". She has been appointed for a three-year term and beat 33 other candidates to the job.

Comments