The European Central Bank was not expected to announce any fresh moves in euro-zone interest rates at its policy-making governing council Thursday, January 18.
No news briefing was scheduled after the meeting, so most economists and ECB watchers were not expecting any rate changes so early in 2001. But a number of observers have suggested that the bank might ease monetary conditions in the 12-country euro zone in the coming months to help counteract any potential fallout from the anticipated slowdown in growth in the United States.
Two weeks ago, the US Federal Reserve slashed its benchmark interest rate, the federal funds rate, by half a point to six percent in a surprise move to kick-start the apparently fast-fading US economy. That has led a number of ECB watchers to predict a reduction in borrowing costs on this side of the Atlantic soon as well.
DB Research economist Stefan Schneider said that he was expecting the ECB to cut rates by half a percentage point in March. The key to a euro-zone rate cut would be the extent of the anticipated slowdown — and consequent monetary easing — in the US, he said.
UBS Warburg economist Holger Fahrinkrug also said that the speed with which interest rates came down in Europe would depend on how aggressive the monetary easing was in the United States.
By contrast, the German banking federation BdB recommended Wednesday that the ECB wait to lower interest rates while inflation in the 12-country euro zone remained above the key level of two percent.
"Following the surprise rate cut in the United States at the beginning of the year, there has been speculation that euro-area interest rates will come down soon as well," BdB wrote in its January economic report.
"But with inflation still way above the tolerance limit, the signs, especially money supply developments, speak against an early rate cut."
The ECB defines price stability as consumer price increases of no more than 2.0 percent.
BdB argued that there was also no need, from an economic point of view, for the ECB to cut rates at present. "Unlike US monetary policy, which is still restrictive even after the January rate cut, the current European monetary policy stance remains neutral for the economy," it said.
Furthermore, euro-area growth was expected to slow only moderately and temporarily, unlike US growth, the federation said. Tax reforms in a number of euro-zone countries would allow growth to gather momentum again during the second half of this year.
"Against this background, it is very likely that the ECB will keep rates unchanged in the coming weeks. Indeed, it might help calm the exaggerated nervousness on the financial markets with its 'steady-hand policy'," it said. In a poll of 37 economists by AFP and its financial news subsidiary AFX, all said that they expected the ECB to hold its key rates steady on Thursday.
Nevertheless, 14 of the 37 economists predicted that the bank might cut rates in the second quarter and seven predicted a cut before the end of the first quarter.—(AFP)
© Agence France Presse 2000
© 2001 Mena Report (www.menareport.com)
