ECB may reduce interest rate again

THE European Central Bank may reduce its benchmark interest rate for the third time in seven months this week as the economy stagnates and the euro’s advance slows inflation, economists said.

The ECB may cut its rate by half a percentage point to 2% when policy makers meet in Frankfurt on Thursday, according to the 32 economists surveyed by Bloomberg News. The Bank of England may keep its rate at 3.75%, a separate survey of 38 economists showed.

“The pressure on the ECB is immense,’ said Ralph Wiechers, chief economist at Germany’s VDMA engineering association, which represents 3,000 companies including Siemens AG. “Lowering rates is the only way to slow the euro’s appreciation, at least for a while.’ French President Jacques Chirac and German Finance Minister Hans Eichel are among politicians who have called on the ECB to trim borrowing costs. The euro region’s economy didn’t grow at all in the first quarter. The currency’s 26% increase against the dollar in the past 12 months is eroding demand for exports as well as helping to curb inflation.

European manufacturing contracted for a third month in May, a survey of purchasing managers at about 2,500 companies for Reuters Group Plc showed yesterday.

The ECB has reduced rates six times since the start of 2001, half as many times as the US Federal Reserve, whose overnight lending rate is 1.25%, the lowest since 1961. A further reduction in European rates would mean borrowing costs are the lowest in any of the dozen euro nations since at least 1948.

Otmar Issing, the ECB’s chief economist, and Lucas Papademos, its vice president, are among central bankers who have signalled a cut is in the cards. Papademos said on May 26 that inflation will be “clearly below” the ECB’s 2% target next year. Issing said the next day that the euro’s gain allows for “manoeuvrability’ in rate discussions.

“Clearly, we’ll get a cut,’ said Julian Callow, an economist at Credit Suisse First Boston in London. “It’s just a question of the magnitude.’ Callow, whose team was last year rated first by its peers in a Thomson Financial survey of analysts, is among 20 economists to predict a half point-reduction. Twelve forecast a cut of a quarter point.

Investors expect at least a quarter point cut by the ECB on Thursday, futures trading indicates. The euro’s strength is making it hard for some Bank of England policy makers to support a rate cut in the UK.