Cut in interest rates expected

THE odds have shortened on a 0.5% cut in European interest rates when the ECB meets today, analysts said.

Optimism of a cut of at least 0.25% rose following strong indications from top ECB officials that the economic environment in the eurozone facilitated a cut in interest rates.

ECB president Wim Duisenberg said inflation would fall significantly in 2004 paving the way for an interest rate reduction announcement today, analysts suggested.

Opinion is divided about the amount, with the interest rate futures market still indicating a cut of 0.25%.

With concerns about the euro exchange rate and the outlook for the eurozone, economies many now expect that the ECB will in fact live up to market expectations and not just cut rates, but do so with a dramatic reduction of 0.5%.

Such a move would probably push the euro back down to $1.12 to $1.14 from its current levels of around $1.17.

If the reduction is just 0.25% some say the impact on the currency exchange rate will be negligible for the time being.

For the first time, however, the consensus view is that the ECB will announce a cut in its key interest rates today despite its long history of refusing to bow to market pressure.

Duisenberg's comments earlier in the week, made in Berlin, that price pressures in the eurozone had eased in recent months and that they would take that into account when deciding on interest rates, is seen as key to today's outcome.

Regarding the outlook for growth, Duisenberg acknowledged the ECB saw "some downside risks to the global recovery in economic activity".

These risks included macroeconomics imbalances in other major economies, such as the huge United States trade and current account deficits.

"In addition, we cannot exclude that the SARS epidemic may have negative supply and demand effects, although it is difficult, at this juncture, to assess the possible implications," Duisenberg said.