Weakening dollar may force ECB into further rate cuts to boost growth

AS the euro moved up towards $1.18 yesterday a top economist warned the ECB may be forced to cut rates by 0.25% in the months ahead to boost economic growth.

If, as most economists now believe, the dollar will continue to weaken, any move above $1.20 against the euro will hit the eurozone recovery hard and may force the ECB to cut rates in order to boost exports.

Economist Alan McQuaid says the likely hike in British rates next month may allow the ECB to hide behind their decision to raise rates.

That argument may be nebulous but could postpone or remove the chances of a cut, said Mr McQuaid. A strong case for a cut of up to 0.5% from the ECB exists, given the pretty parlous state of the EU economies, due to grow by just 0.5% this year against a strong 2.6% GDP outturn in the US.

While interest rates cuts are definitely at the bottom of the cycle economists believe the ECB is in denial about the specifics of its own situation.

In a recent review Brown Brothers Herriman revised downwards the outlook for European growth and boosted the projected figure for the US from 2% to 2.6%.

Citing the dollar as a key factor, the US merchant banking group said its projected decline to $1.15 by the fourth quarter of 2004 has serious implications for European growth going forward.

That concern is shared by Mr McQuaid who believes the ECB strategists are seriously deluded and still working to an outdated Bundestag model of how to manage monetary policy.

“In the second quarter of this year economic activity across Europe fell, but the ECB is maintaining the fiction that a rising tide lifts all boats,” he said.

In that context when the realities start to bite in a few months time “the ECB may well be forced to eat their words on interest rates and a cut of 0.25% may well be implemented against the emerging global trend”, he said.