FRANKFURT (MNI)- Weak Eurozone economic data may change the
European Central Bank’s economic projections, but is unlikely to spark a
reaction from the central bank at its August meeting, recent comments by
ECB policy makers suggest.

Flash Eurozone PMIs, released Monday, showed that services and
manufacturing output shrunk for a sixth straight month in July and
followed the steepest quarterly fall in activity for three years between
April and June.

The index also signalled that economic weakness is becoming
entrenched in the core countries of Germany and France, which both
posted larger-than-expected declines. Germany’s key Ifo business
sentiment indicator for July, released Wednesday, surprised on the
downside and hit the lowest level in over two years.

Results of the ECB’s 2Q Bank Lending Survey, which showed sharp
declines in loan demand in the second quarter and expectations of
further declines in the months ahead, added further evidence to an
increasingly gloomy economic environment.

“Growth dynamics for the Eurozone as such are tending to be lower
than we had been expecting at the start of the year,” ECB Governing
Council member Ewald Nowotny conceded in interview with Bloomberg
released on Wednesday.

Nowotny also noted that “inflation also tends to be lower”, while
ECB President Mario Draghi went a step further last week noting that the
bank’s inflation expectations had changed even since the last policy
meeting. The latest PMI showed that price pressures were abating with
prices charged by companies, both in manufacturing and services, posting
the largest fall since February 2010.

Nevertheless, Nowotny appeared to signal that there would be no
move at next week’s policy meeting. The option of cutting rates again,
which could involve lowering the deposit rate into negative territory,
“has to be decided at a later stage,” Nowotny said.

“We do not have experience of course with negative deposit
rates…There might be some technical problems to applying negative
rates for the deposit rate. For the time being this is not a practical
aspect that is being discussed,” Nowotny said.

Executive Board member Benoit Coeure last week also said that
“before making the next step, which would be moving the deposit facility
to a negative yield, we’ll reflect about it.” Coeure noted that “it’s
unclear whether markets can function at negative interest rates. Some of
them can. Some of them apparently can’t.”

Denmark introduced a negative interest rate this month and the ECB
is watching closely how the move plays out. The ECB may want to wait
another month before taking a decision as the first major central bank
to move interest rates into negative territory.

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

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