ECB rules out further interest rate cut

THE European Central Bank is set to disappoint markets by refusing to cut interest rates due to the expected quick end to the war on Iraq.

This follows a weekend statement by three of the ECB’s policy makers who said a rapid end to the war would boost economic recovery across the globe.

The statement appears to rule out an early reduction in the cost of borrowing across Europe anticipated by analysts as a further boost to the ailing eurozone economy.

“The fact that the uncertainties have declined and that the oil price is at a level well below the one that was feared, make an economic rebound in the second half more realistic,” ECB council member Jean-Claude Trichet said after meeting with Group of Seven finance ministers and central bankers over the weekend.

These comments suggest the ECB may ignore calls for lower rates from the European Commission and the International Monetary Fund.

ECB president Wim Duisenberg’s comments on Saturday lent support to the apparent hardening of the bank’s stance of lower interest rates.

“The monetary environment is favourable to economic growth, I don’t see that many downside risks to economic growth,” he said.

Bundesbank president Ernst Welteke said the bank won’t heed rate-cut calls from the IMF.

The ECB lowered its main lending rate to 2.5% from 2.75% in March pushing rates to historic lows. Another cut of 0.25% would put borrowing costs at their lowest in any euro country since 1948.

This hardening of the ECB’s stance follows an easing of fighting in Iraq and a 20% cut in oil prices in the past month.

It also follows a worrying reduction in the growth forecast for the second largest economic block by the EU Commission just over a week ago, which increased expectations of a further ECB rate cut.

Growth in the eurozone will grow by 1% in 2003, down on the commission’s November forecast of 1.8%.

Meanwhile, the IMF cut its growth forecast for the $7 trillion economy by more than half last week, to 1.1% from 2.3% in September.

At the time the IMF noted consumer confidence was depressed, industry production was moribund and unemployment was rising.

Mr Duisenberg acknowledged low confidence among consumers and investors was a problem, suggesting the bank may still pare rates if the expected recovery in the second half doesn’t materialise.

“There is a lot of pent-up demand, both by consumers and investors, but we need to restore the confidence in their own future before they will increase demand,” he said.