Ifo urges ECB to cut rates

December 19, 2001 Posted: 1104 GMT

LONDON (CNN) -- Leading economic institute Ifo has urged the European Central Bank to cut interest rates by half a percentage point early next year.

The ECB has slashed its key interest rate by 1.5 percentage points so far this year to 3.25 percent and market participants expect further easing in January or February.

While urging the ECB to trim rates as soon as possible, Ifo president Hans-Werner Sinn said he expected the ECB to cut by only a quarter point at its next policy setting meeting on January 3.

"The ECB has room to cut rates by 50 basis points (0.5 percentage points) as soon as possible," Sinn told reporters at the release of Ifo's latest economic forecast for Germany on Wednesday.

Ifo said the German downturn should level out in the second quarter of 2002. The institute forecast growth would come in at 0.5 percent this year and then creep up to 0.6 percent in 2002.

"After weakness during the winter, German gross domestic product will slowly pick up again from the second quarter of 2002, stimulated by improving growth in the U.S.," Ifo said.

The German economy contracted 0.1 percent in the third quarter and Ifo predicted a further 0.25 percent quarter-on-quarter drop in the fourth quarter.

That is below a joint forecast in October by Germany's six leading economic institutes, including Ifo, for growth to rise by 0.7 percent this year and 1.3 percent in 2002.

The Ifo forecast echoes a report by the International Monetary Fund that said the economic slump in the 12-nation euro zone could be more prolonged than expected.

The 183-nation lending agency on Tuesday released an updated World Economic Outlook report to take into account the impact of the September 11 terrorist attacks.

The new forecast sharply lowered growth estimates for the world economy, including the euro region, below its October report, which had been prepared in advance of the terrorist attacks.

Ifo predicted German unemployment, which has risen amid hefty corporate lay offs, is set to reach 9.1 percent this year and 9.3 percent in 2002.

Last month, Ifo's closely-watched indicator of German business confidence perked up for the first time since July, but sentiment in the world's third largest economy still remains near an eight-year low set in October.