ECB to resist Franco-German pressure for rate cut

THURSDAY’S European Central Bank (ECB) meeting is unlikely to cut interest rates further, according to leading economists.

The ECB will instead reject political pressure from German Chancellor Gerhard Schroeder and French Prime Minister Jean Pierre Raffarin, who called for a fresh cut in interest rates last week to help boost continental Europe’s sluggish economies.

IIB Bank economist Austin Hughes said a rate cut would be of limited benefit to European economies following the euro’s minor recovery against the dollar, which has seen it fall back from $1.29 towards the $1.24 mark in recent weeks.

Mr Hughes also said the euro was relatively weak against sterling and that concerns over the euro’s value had receded for the time being.

He suggested the ECB would look to cut interest rates only if there were more compelling reasons to do so and that economic growth in Asia and America provided the eurozone with a platform to increase exports, even at the euro’s current levels.

Mr Hughes also expected the ECB to be cautious in any move on interest rates and that last week’s interventions from politicians were likely to be counterproductive.

Friends First economist Jim Power agreed that a rate cut was unlikely. Mr Power said the current strength of the euro was taking its toll on European manufacturers but that economic indicators were holding up well.

He said calls for a rate cut from Germany and France were in response to negative trends in business confidence surveys but that any economic arguments for a cut were not yet persuasive enough to sway the ECB.

A survey of European economists by Bloomberg news agency found that almost all expected no change in rates, which are at historic lows of just 2%.

Economists are almost universally opposed to the use of interest rates as a short-term tool to manage the euro’s performance on the foreign exchange markets.