FRANKFURT (MNI) – Weakening economic data and rising money market
tension suggest the European Central Bank could ease interest rates and
step-up liquidity support measures as soon as next month.

November’s flash Eurozone PMI surveys and September’s industry
orders, both released Wednesday, suggest that the region will fall back
into recession in the fourth quarter.

The composite PMI may have shown a surprise recovery on the back of
stronger services, but it remained firmly under the 50-point threshold
signalling expansion. The key manufacturing index dropped to the lowest
level since July 2009.

Hard data showed that Eurozone industry orders dropped a much
bigger-than-expected 6.4% in September — the largest month-on-month
fall since December 2008. Orders were dragged down by a plunge in
volatile heavy transport equipment, but even excluding this category,
they were still down 4.3%.

In the absence of a comprehensive crisis solution, the negative
feedback loop between the financial markets and the economy is likely to
persist and the real economy may yet have to brace for worse to come.

For now, the crisis seems to be spreading ever deeper into the core
of the Eurozone. On Wednesday, weak demand for German Bunds — with only
E3.889bln bids for E6bln of new 10-year paper — raised fears that the
crisis was knocking at Berlin’s door.

Regardless of the role the ECB may or may not play eventually in
calming the sovereign debt markets, Governing Council members have
indicated that the bank stands ready to cut interest rates again should
the economy weaken further.

A day after the Governing Council’s mid-month meeting last Friday,
Governing Council member Jozef Makuch told MNI that monetary policy
moves will largely hinge on December’s new ECB staff forecasts. “The
outlook is clearly worsening and downside risks are on the rise,” he
added.

The latest data and the fact that ECB President Mario Draghi has
refrained from describing current interest rates as “appropriate” even
after the last rate cut suggest that the ECB may cut interest rates
again as soon as next month.

Draghi’s second monetary policy meeting as head of the central bank
may see even more action than the first. Rising tension on the interbank
market could encourage the Council to ramp up liquidity support measures
even further.

Eurozone banks’ demand for ECB funding surged to a 2-year high on
Tuesday as creditworthiness concerns cut off ever more banks from
wholesale funding. The ECB loaned just shy of E250 billion to Eurozone
banks in its main weekly refinancing operation.

Draghi said Friday that the ECB is “aware of the current
difficulties for banks due to the stress on sovereign bonds, the
tightness of funding markets and the scarcity of eligible collateral.”
In a possible hint that more liquidity support is in the offing, Draghi
cited counter-measures taken “so far.”

Additional measures that have been floating around as possible
options include the expansion of the ECB’s collateral framework or the
introduction of refinancing operations even longer than one year.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

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