ECB leaves rates on hold

September 27, 2001 Posted: 1140 GMT

LONDON (CNN) -- The European Central Bank has left interest rates at 3.75 percent after recently trimming rates in response to the terror attacks on the U.S.

But market watchers said on Thursday they expect another rate cut as early as next month, as inflation eases towards its 2 percent target amid concerns the U.S. economy could tip into recession.

The ECB, which sets interest rates for the 12-nations of the euro zone, joined the U.S. Federal Reserve and other central banks in reducing rates 10 days ago to restore confidence after the September 11 terrorist attacks in the U.S.

"The next rate cut will come in late October," John Butler, economist at Dresdner Kleinwort Wasserstein, told CNN. Butler believes interest rates could tumble to 3 percent by next year because "inflation is collapsing."

Rosemary Radcliffe, economist at accountants PricewaterhouseCoopers, said: "There is room for a quarter point rate cut to help confidence."

PricewaterhouseCoopers lowered its growth forecast for the European economy to 1.75 percent from 3.3 percent in 2001. Meanwhile, the International Monetary Fund on Wednesday revised its growth target for the euro zone to 1.8 percent from an earlier estimate of 2.4 percent.

For Germany, the largest economy in Europe, the IMF put growth this year at 0.8 percent, 1.1 percentage point below its May projection. It forecast Germany would grow by 1.8 percent next year.

Easing German inflation, which slowed to 2.1 percent year-to-year in September from 2.6 percent in August, raises the prospect of another rate cut in October.

The ECB has been criticized for not cutting interest rates as growth in the euro zone wanes, while the U.S. Federal Reserve has trimmed rates eight times to boost sluggish growth and to compensate for the terrorist attacks on New York and Washington.

IMF chief economist Kenneth Rogoff said it was too early for the organisation to estimate the effects of the attacks on the world economy.

"There is no doubt that the attack is having a negative effect on activity now in many regions of the globe, and that it has increased what were already significant downside risks to the short-term global outlook," Rogoff said.

German Chancellor Gerhard Schroeder told the German parliament that he hoped that the ECB would coordinate action with the Fed again. "I can only ask them (the ECB) to keep up its policy of active coordination and action with the Federal Reserve," Schroeder said.

The Fed is expected to cut interest rates by 0.5 percent at its next meeting on October 2.

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