Home
News Categories:   Top Headlines |  Business |  International |  Sports |  Entertainment |  Science |  Health |  Strange  
 
Email this News Story to a Friend
European Bank Expected to Cut Rates


12:53 AM EST June 05, 2003
The Associated Press


FRANKFURT, Germany

The European Central Bank is expected to cut interest rates for the first time in three months as it tries to shove the continent's flat economy toward growth.

Even as gloomy economic news piled up, the ECB has left its key refinancing rate at 2.5 percent since cutting by a quarter percentage point March 6. However, many economists believe bank President Wim Duisenberg gave the green light for a cut Thursday during a speech in Berlin this week in which he credited the euro's strength for helping reduce inflation.

"Inflationary pressures have declined substantially in recent months, and these developments will be reflected in our policy deliberations," he said.

The Frankfurt-based ECB's main mission is fighting inflation, and it only cuts rates when its officials can argue there's no danger of prices getting out of hand. Rate cuts - a tonic to growth because they lower businesses' borrowing costs - can fuel inflation.

With several other bank officials making similarly unconcerned statements about inflation recently, all 31 economists polled by Dow Jones Newswires predicted a cut. The only question is whether it will be a quarter-point cut or a bolder half-point move.

"There will be a cut, of course. Mr. Duisenberg all but said so," said Michael Schubert, an economist at Commerzbank in Frankfurt. "Could anyone be clearer?"

Economists say the euro's rise to a record level against the dollar is a key factor pushing the ECB's 18-member governing council toward a reduction. The rising euro contributes to reducing inflation, since it makes imported goods and raw materials cheaper.

It also threatens growth by making European exporters' goods more expensive. Some argue the resulting drag on growth has canceled out the effect of the bank's last cuts, in December and March.

The euro hit a record of $1.1932 against the dollar May 27, having risen some 37 percent in 16 months. It traded around $1.17 Wednesday.

Growth in the 12 countries that use the euro was zero in the first quarter. Three countries - Germany, the Netherlands and Italy - showed a slight contraction.

While investors, politicians and economists have argued for a cut, the ECB has stuck to its view that keeping prices stable is its best contribution for the economy.

The bank has said the European economy should gain speed later this year, with officials making reassuring remarks that the euro's rise only brings it back to historical average levels that shouldn't hurt the economy.

Bank officials such as vice president Lucas Papademos have said deflation - a vicious circle of falling growth and prices currently afflicting Japan - isn't likely.

 
E-mail this News Story to a Friend