ECB ‘has scope to cut rates by 0.5%’

ROYAL Bank of Scotland group chief economist Jeremy Peat said there was still scope for the ECB to cut rates by as much as 0.5%.

But the bank appears to have ruled out any cut in the short term, he said.

Mr Peat was addressing an Ulster Bank breakfast in Dublin on the future outlook for the global economy. On Ireland, he was positive. This year he forecast 2.5% GNP, but warned the gap between GDP and GNP has become too wide due to the high reliance on export-led growth attributable to the US-dominated pharmaceutical sector.

Its performance was not having much of an impact on the domestic scene and that was an issue we had to address if we are to get better returns form foreign direct investment in the years ahead, he said.

“You cannot for ever live on an export-led story. You have to have much more value embedded into your economy.

My expectation is that you will see a significant recovery this year with growth of 2.5% in GNP terms and somewhat faster in GDP terms,” he said.

“Then if we get US-led recovery feeding through in key markets in Europe as well by the end of the year, then 2004 should be a much better year. You’ll come through that process well and you will have had a far less problematic phase during these three years of wretched global economic conditions than most of your partners,” he said.

“I’m relatively optimistic about your economy,” he said. Responding to the issue of inflation and house price bubbles, Mr Peat said there are always risks of things going wrong. “I don’t think that is something you need be overly afraid of, but you are still running an inflation rate that is higher than your eurozone partners.”

It will put stress on competitiveness if it endures for too long, he warned.

“You have to get your rate of inflation towards the eurozone average.”

While inflation remains a concern, Mr Peat said: “I think you have something much more positive to take from this story than practically any other member of the eurozone.”

But much will hinge on the US recovery and the “green shoots” have appeared too often in the past to urge caution about when the US pick-up will happen. If recovery does occur this year it will have to be US-led because the euro region is showing no signs of growth and will do well to achieve growth of 1% for 2003, he said.

The US will start to recover later this year, but he doubts the ability of the US to keep the world economy afloat if it continues to run 5% deficits.