Pressure increases for interest rate cuts in US and Europe

POOR global economic data has

In the US, the Federal Reserve’s Beige Book, published yesterday, makes it clear that the economy is still struggling. The Beige Book is published in advance of every meeting of the banks to decide on interest rates.

This is set for November 6, and several economists suggest that only for the US elections and the uncertainty about a war on Iraq, the Fed would almost certainly cut rates when it meets next week. Other factors, however, come into play when judging the direction of US interest rates.

Recent share price rallies in the US puts pressure on long-term rates, which tend to rise as equities increase in value. Traditionally, long-term rates have always been driven by the performance of equities, but there is no certainty that the recent rallies mean equities have bottomed out at this stage.

Hibernian Investment Managers, in a recent assessment, suggested that shares would not start to show a definite

upward path until share values decline further. With conflicting factors at play, economists say it is difficult to predict the next US move, although all the indicators point to another cut at this stage. Senior economist with Ulster Bank Markets, Niall Dunne, commenting after the publication of the Beige Book, said if other factors such as the likely war on Iraq and the current mid-term elections in the US, the Fed would almost certainly lower rates when it next meets.

In its Beige Book commentary, the Fed noted the persistence of “sluggish” economic activity, warning that retail sales were “weak across the nation,” while pointing out that manufacturing and industry conditions were stagnant. Mr Dunne believes the bias towards another cut persists, but for the moment, no final decision will be made until the elections are out of the way.

However, AIB in its Monthly Market Focus, while in broad agreement with Mr Dunne, sees the reluctance to cut rates as an indicator that rates may indeed have bottomed.

It emerged yesterday that the British Monetary Policy Committee was split on a further interest rate cut, while the ECB has always been very slow to hit rates in view of its inflationary

concerns.

However, the bias of opinion is leaning towards the next US interest rate move being upwards, despite the uncertainty surrounding the economy and the stock markets.

In the case of the ECB, however, with economic weakness there a major concern, Austin Hughes of IIB Bank has not ruled out a cut in ECB rates in the months ahead.

In currency terms, the US is still seen as the most likely to show reasonably growth ahead of the ECB and the euro is expected to continue to trade under a dollar.

Most analysts expect it to stay within the $0.95-1.00 range in the months ahead unless war with Iraq throws the currency off balance in the months ahead.