The European Central Bank (ECB) will cut its key interest rate in December as the credit crisis pushes the euro-area economy closer to a recession, Citigroup said, revising an earlier forecast.
"The ECB continues to underestimate the negative implications of the crisis on the whole economy," Citigroup's London-based economist Juergen Michels said in a note to investors published today.
"With an increasing probability of a near-term recession and a good chance of falling below 3 per cent in November, we are bringing forward the forecast of the first 25 basis points rate cut.''
Michels had previously predicted the bank wouldn't lower rates until the second quarter of 2009.
The ECB raised its benchmark rate to a seven-year high in July after the inflation rate surged to 4 per cent, twice the ECB's limit and the highest in 16 years.
Still, the yearlong credit crisis, which was sparked by a US housing recession, escalated this week with the collapse of Lehman Brothers Holding, roiling financial markets and freezing lending between banks. Central banks globally injected billions of dollars to unlock credit markets.
Even though ECB policy makers were "shocked by recent events," an immediate rate cut is unlikely, Michels said.
The bank is "still very concerned about second-round effects," where workers demand higher wages to compensate for the increase in the cost of living and companies raise prices to offset raising wages.