ECB will consider further bank rate cuts

WITH ECB bank rates still well ahead of the US — 2% against 1.25%, it would be wrong to rule out further cuts.

In his comments after the dramatic 0.5% cut yesterday, ECB President Wim Duisenberg made it clear the bank will act again if necessary.

This seemed to herald a change of stance by the ECB which has been slow to follow the slash interest rate policy adopted by the United States once it became obvious the economy there was in trouble.

In typical central banker speak he added he could not understand the comments from the International Monetary Fund that Germany was flirting with deflation.

However in quarter four of 2002, it achieved zero growth and in quarter one of this year it just managed growth of 0.3%.

On the basis that two zero or sub-zero consecutive growth quarters constitutes recession, Germany just narrowly missed being there in recent months.

Economists regard the deflation threat in Germany as quite real even if Mr Duisenberg thinks otherwise.

Austin Hughes, chief economist IIB Bank, believes the ECB will cut again it has to but not until September at the earliest.

However, if the euro got much stronger or the euro economic zone continues to flounder, then a further cut of 0.5% from the ECB cannot be ruled out he said.

Niall Dunne, chief economist of Ulster Bank Financial markets and Jim Power, chief economist Friends First, are among those who believe that the cut of 0.5% in Europe was long overdue given the state of some of the bigger economies.

Germany accounts for one third of the European output and the implications of a serious recession there could be global in their reach, but not as far reaching as the recent US slowdown that brought an abrupt end to the Celtic Tiger.

In that context the cut of 0.5% was long overdue.

Ironically, the euro rallied on the back of the 0.5% interest rate cut from the European Central Bank.

Most expected the dollar to rally but the euro went to over $1.18 against the dollar on the day, up nearly 3 cent, contrary to what every money dealer expected.

But then economists point out that we are in very uncertain economic times.

Mr Dunne believes the cut of 0.5% was extremely positive for the European and global economies.

It will put more money into the pockets of consumers and boost spending.

The knock-on effect ought to be beneficial and if, as some expect, another cut of 0.25% will follow down the line then the “seeds” of economic recovery may have been sewn.

It was too early to talk “about the green shoots of recovery” Mr Dunne said.