Interest rate cuts expected on both sides of Atlantic

Business Editor

Bank chief economist, Austin Hughes said pressure was building for lower interest rates on both sides of the Atlantic and he expected a cut in the coming weeks.

Rates are currently 3.25% in Europe and 1.75% in the United States. A half a percentage point cut would bring rates here down to 2.75%, which is still 0.25% above their all time low 2.25% since the introduction of the European single currency.

“If central banks cut rates they will have to be seen making a meaningful contribution so in order to kick start activity we could see a half a percentage point rate cut,” he said.

US data released yesterday again suggests that there is a clear and present danger to the economic recovery worldwide.

While retail sales show US consumers continued to spend in August, the Michigan data was lower than expected, its lowest since last November, which points to a downside risk for the economy.

Producer price numbers show a decline in producer prices in August and this points to the risk of deflation for the US economy continues to build.

The problem facing Alan Greenspan of the US Federal Reserve and Wim Duisenberg of the European Central Bank (ECB) is similar to that faced by politicians thinking about striking against Irag, said Mr Hughes.

“It could do more harm than good,” he stressed.

Mr Hughes said over the next couple of weeks the risk of doing nothing would be greater than cutting rates.

Comments from both sides of the Atlantic suggest central bankers are growing more concerned about the overall outlook for global economic activity.

On this side of the Atlantic, a very superficial reading of Mr Duisenberg’s remarks might appear to pour cold water on the prospect of a rate cut.

“He noted that monetary growth remained strong. He expressed concern about wage growth. He said he expects economic growth to strengthen next year and he said that because price risks were now balanced that interest rates were appropriate. Far more telling was the way he downplayed inflation risks and introduced a note of concern about economic prospects,” he said.

“Our reading of today’s ECB Press Conference is that the ECB has moved a long distance towards the point at which another rate cut will be implemented. Unless we see unexpectedly strong business sentiment data or poor inflation figures in the next month, a rate cut is likely in either October or November.

“We continue to think that in order to kick-start economic activity and avoid pressure to cut quickly again, the ECB could even opt for a half percent rate cut,” said Mr Hughes.