Signs of divide on the ECB Governing Council; hawks talk down chances of a January cut

In comments in a speech last night Bundesbank President Weber sounded notably cautious about the prospects for a further ECB cut next month, "I don't believe that in January we will already have much new information of relevancy that leads to a new evaluation of the existing monetary policy room to manoeuvre."

Indeed, in comments that conveyed a reluctance to move significantly beyond the ECB's current level of policy rates, he noted that "We should be cautious when our rates approach territory we haven't explored before...Our lowest level so far was 2 percent." While Mr Weber did acknowledge that the ECB has "further room to manoeuvre" (i.e. seemingly not ruling out the possibility of further easing) he did also note that "If the benchmark rate sinks below 2% when medium to long-term inflation expectations are just below 2%, that implies negative real interest rates...I would like to avoid that."

Those relatively hawkish comments from Mr Weber were a marked contrast in tone to the views expressed by Cyprus Central Bank Governor Orphanides in a speech also delivered last night. Mr Orphanides clearly enunciated that (in his view, i.e. not claiming to speak on behalf of the Governing Council as a whole) "the view that monetary policy becomes ineffective and cannot contribute further to credit growth when the short-term rate reaches zero, or very low levels, is wrong", and also noting in his speech that the ECB is "always ready to take further action when this is deemed appropriate".

In addition, the apparent divide in views among ECB Governing Council members is also reflected in an article in this morning's Wall Street Journal, which comments that ECB policymakers "appear divided on how quickly to cut their key rate again".

Overall, we believe that while there is evidently a growing divergence among Governing Council members on prospects for the economy, one cannot exclude yet further easing in January, or a bigger cut than 25bp in February. That said, recent comments do make a January move less likely than previously, and whether or not the ECB lowers the refi rate below 2% will depend on the news in the data in H1 09.

James Ashley wrote in a Barclay Capital Research report.