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ECB, BoE leave rates on hold
LONDON, England -- The Bank of England and the European Central Bank have decided to keep interest rates on hold, even as the European Commission trimmed growth for the 12-nation euro zone. Britain's central bank Monetary Policy Committee (MPC) left rates unchanged at a 38-year low of 4 percent on Thursday at the end of their two-day meeting. The European Central Bank also held the line on Thursday, leaving interest rates at 3.25 percent, but economists expect the bank to cut rates by the end of the year as stock markets continue to tumble and Europe's biggest economy, Germany, stumbles out of a recession.
Germany "is on the ropes and in serious danger of a double dip into recession after three successive negative quarters of growth for Gross Domestic Product last year," economists at Bear Stearns wrote in a note to investors. Those same economists believe the ECB could cut rates in November, which is in line with a poll by Reuters that showed central bank watchers expect interest rates to be trimmed in November or December. Economists argue Germany's economic woes are compounded by the prospect of falling prices, raising the spectre of deflation. ECB President Wim Duisenberg slammed the door on a rate cut in testimony before the European Parliament on Tuesday, saying rates were appropriate and inflation risks were balanced. Duisenberg has argued only reforms of the labour and financial markets can pull Europe out of the doldrums.
Holgar Schmieding, economist at the Bank of America, told CNN that "Germany's troubles are not monetary" -- that is to say they cannot be corrected by the interest rate cuts. "Germany is bearing the brunt of the global economic slowdown but the economy has problems because of structural issues. The ECB will argue, quite rightly, that inflation is above target and wage inflation is above target. So it will feel justified in keeping rates at current levels," he said. The 12 nations that share the euro are expected to grow between 0.2 percent and 0.5 percent this quarter, down from 0.3 percent to 0.6 percent, the European Commission said, adding that weak consumer spending and international demand were to blame. But sluggish growth is hitting the banking sector. Banks in Germany have entered a crisis period as earnings collapse, risks rise and the shares of its top three listed lenders -- Deutsche Bank, HVB Group and Commerzbank -- have fallen between 45 and 72 percent in the past six months. Failures of small- and medium-sized banks have increased the sense of urgency. Klaus Baader, an economist at Lehman Brothers in London, told Reuters the ECB would be loathe to cut rates when core inflation is running above 2 percent and money supply growth was surging. "You'll need a couple of months of compelling evidence that the ECB's downwardly adjusted growth estimates are being undershot to convince them to cut rates,'' Baader said.
Yet despite Duisenberg's tough talk that monetary policy could not solve the region's growth problems, some economists still saw an underlying softer tone in his comments. Duisenberg's statement that growth would only be "more in line'' with its estimated 2.0-2.5 percent long term growth rate in the course of 2003 appeared less certain than previous forecasts And his comment that excess liquidity in the euro zone only "might'' signal inflation risks was also softer, they said. While the global economy and Britain's manufacturing sector are struggling, UK house prices are rising at record levels and consumers have managed to keep the economy chugging along. "All year, there has been evidence of a two-speed UK economy with house prices, consumer spending and low unemployment balancing a stuttering manufacturing sector, sub-target inflation and weak international economies,'' Steve Scott, bond strategist at Dresdner Kleinwort Wasserstein, told Reuters before the decision. "In the last month, these divisions have been clearly maintained, and thus probably compel the MPC into leaving rates unchanged at 4 percent for yet another month,'' he said. Business and trade unions have called for a rate cut as an insurance policy against a global economic slowdown. "With the recent confirmation that the manufacturing recovery is on hold, we expect economic growth forecasts for both the world and UK economies to be cut back in the forthcoming Pre-Budget Report,'' said Trade Union Congress boss John Monks. "The risks of an economic growth shortfall now outweigh the risks from speculative house price inflation,'' he said. Surging house prices and high personal debt were cited by the MPC among arguments against rate cuts in September. Halifax (HFX), Britain's biggest mortgage lender, said earlier this month that house prices jumped 4.3 percent in September. Reuters contributed to this report
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