Hopes for interest rates cut dashed

HOPES of another immediate cut in European rates were dashed yesterday by the bullish statement on the chances of economic recovery in the United States.

In fact, the prospect of such a recovery may mean the interest rate cycle has bottomed out, analysts said.

Because of recovery prospects in the US there is no chance the ECB will follow its recent reduction of 0.5% with another cut.

This follows the statement by Federal Reserve chairman Alan Greenspan about better times ahead of the economy made after he cut US rates by 0.25% on Wednesday.

His statement was seen as positive by the markets who hang on his every word.

In it, the most powerful central banker in the world talked about disinflation and not deflation in the US.

That comment was seen as crucial.

Deflation would have suggested he saw further economic slowdown looming in the US.

That slight shift in emphasis from Mr Greenspan definitely says the ECB will be slow to cut rates further.

They will want to wait and see if the recovery anticipated in the US will start to have an impact on eurozone growth in the coming months.

It would be wrong for investors here or home buyers to pin too many hopes on the ECB cutting rates again soon, analysts said.

The markets also expect the euro rally against the dollar be maintained.

By late yesterday afternoon it was trading slightly above the 1.14 level, still well off the 1.19 -1.20 levels achieved at the peak of the recovery to date.

The markets still believe the view that the US wants the dollar to stay weak in order to boost its economic recovery prospects.

By the year end many forecasters expect the euro could be as high as 1.18.

But the view is not unanimous. Some suggest the United States recovery could push the dollar back up, in the months ahead leaving the euro at around 1.10 by the end of the year.

Meanwhile, the stock market rallies that have seen gains of up to 20% achieved since March are not likely to be sustained much beyond current levels, said Niall Dunne, economist Ulster Bank Financial Markets.

At present, the Dow has recovered to 9030 against an all time high of 11,750 reached before the bubble burst in early 2000.

In London the FTSE is well off its record high of 6950 and closed yesterday at 4040. In Dublin the rally, to date, has left the ISEQ 100 index down at 4270 against its all time high of 6526.

Given the state of the global economy, second quarter results due to start filtering through in the next few weeks will still show weak earnings across the corporate spectrum.

Inevitably, analysts expect the relatively low earnings outlook to hold back markets in the short term.

They also point out that at their height they were overpriced.