ECB could set the stage for rate cut

30 March 2004

BERLIN – The euro skidded down to a new low for the year Monday as market expectations grow that Thursday’s meeting of the European Central Bank’s 18-head rate-setting council could set the stage for a build-up to a cut in interest rates.

While most economists are not expecting the ECB to reduce borrowing costs this week, they have not entirely ruled out the world’s second most influential central bank trimming rates to shore up shaky economic sentiment in the 12-member eurozone and to keep the currency bloc on a growth path.

Previously most economists had believed that the ECB would keep rates at their current post-Second World War low of two percent until the end of the year.

But coming on the back of comments last week by ECB chief Jean-Claude Trichet that the bank was prepared to revise its economic outlook if consumer demand failed to pick up, a growing number of analysts believe that the bank will use this week’s meeting to help lay the ground for a cut in rates by the middle of the year.

Trichet’s comments were followed by remarks by another member of the ECB’s governing council, Gertrude Tumpel-Gugerell, who indicated that the bank was ready to act in a bid to counter signs of weakness in the economy and added to the market’s impression that the bank was opening the door to a rate cut

The question of a rate cut is not if but when, said Rainer Guntermann, European economist with the investment bank Dresdner Kleinwort Wasserstein.

The ECB last cut borrowing costs in June by a hefty 50 basis points. But with official rates in the eurozone more than double the level of official US rates, the euro has over the last 12 months or more gained ground against the dollar to nearly hit an historic high of USD 1.30 on two occasions this year.

But with the market buzzing with talk of a rate cut, the euro slumped to as low as USD 1.2045 in trading Monday before edging back up to over USD 1.21 later in the day.

Inflation in the eurozone fell from 1.9 percent in January to 1.6 percent in February, the lowest level for four years, official data showed.

Talk of a rate cut has been heightened by growing evidence that the long-awaited eurozone recovery was starting to lose momentum with two key economic sentiment surveys for Germany, the currency bloc’s biggest economy, falling for the second time in two months in March.

A drop in the so-called ZEW index, which surveys institutional investors and analysts, was followed up by a bigger-than-forecast drop in business confidence in Germany fuelling concerns that Germany’s recovery from three years of stagnation was at risk.

Drawn by the Munich-based Ifo institute and based on a survey of 7,000 executives, the fall of the Ifo index prompted renewed calls for the ECB to ease monetary policy with Ifo institute chief Hans- Werner Sinn saying the ECB should act now to boost flagging confidence.

The European Commission on Monday forecast a moderate recovery for the eurozone economy this year and next saying growth in the first half of 2004 would remain between 0.3 and 0.7 percent before accelerating to reach between two and 2.5 percent in 2005.

But a report released Monday showed consumer confidence in Germany stagnating during March as high unemployment and the ongoing debate about economic reforms meant that consumers remained reluctant to spend.

The report, prepared by Nuremberg-based GfK AG market research company showed consumer sentiment in Europe’s biggest economy stagnating at 5.1.

Consumption is therefore not providing any notable impetus for economic recovery, GfK said.

The widespread uncertainty which is directly linked to the weak labour market is likely to result in stagnant demand in Germany, which in turn would strain overall economic growth, it said.

The ECB will also receive further evidence on the state of the eurozone economy ahead of Thursday’s meeting, with business and consumer confidence reports drawn by the European Commission and to be released just 24 hours before the ECB meeting also tipped to show no change from the previous month.

 DPA

Subject: German news