| ||
| ||
| ||
 |
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
ECB cuts rate to prop up economy
LONDON, England (CNN) -- The European Central Bank cut the cost of borrowing on Thursday to prop up a flagging economy and counter the impact of any war in Iraq. The ECB cut its benchmark interest rate by 0.25 percentage points to 2.50 percent. The 12-nation euro zone bank last lowered rates on December 6 by half a point to 2.75 percent. Earlier, the Bank of England left rates unchanged at 3.75 percent despite growing evidence of an economic slowdown. But the Bank of England had shocked the market with a quarter-point cut last month, leaving interest rates in the world's fourth biggest economy at their lowest level since 1955. The ECB's decision to cut interest rates comes as German unemployment rose to a new five-year high on Thursday. The President of the Federal Labor Office warned: "The labor market cannot recover while the economy stagnates.'' (Full story) ECB President Wim Duisenberg had signaled the 12-nation euro zone bank may be ready to cut interest rates last month. But it has been roundly criticised for not moving fast enough to counter an economic downturn. But European markets slipped into negative territory because some central bank watchers had been expecting a bigger move. (Full story) "We believe the ECB should cut by a half point today and it has every vindication to do it," economist at Bear Stearns said in a note to investors before the decision. "We know the ECB will cut rates, because Duisenberg told the markets it was on the cards at the recent G7 (Group of Seven industrial nations) meeting in February. He warned that the outlook for Eurozone recovery was weak and the ECB's hands would not be tied by the threat of war with Iraq." "In plain truth, there is a multiplicity of reasons why the ECB needs the bigger cut, but there are three primary ones. They are growth, inflation and the strong euro. Dreadful German jobless data showing a sharp 67,000 jump in unemployed and the deflationary squeeze posed by the strong euro risk pushing the German economy over the brink into recession." "The euro could suffer as a result of a bigger half-point cut today, but we doubt that it will be terminal." The German economy, Europe's biggest, has struggled to recover from a recession in the second half of 2001. Its economy stagnated in the last three months of 2002, and many economists believe it could sink back into its second recession in as many years. Rising unemployment, tax increases, consumer confidence at an eight-year low, and a war with Iraq could further undermine the German economy. The euro zone's massive service sector, the powerhouse behind European economy, is shrinking. And the euro stormed to the four-year high on Wednesday hurting exporters. (Full story) As Europe's economic workhorse, Germany has a big impact of the growth prospects of the 12-nation euro zone. Duisenberg has lowered the bank's outlook for the euro zone economy and indicated it could cut interest rates soon. Previously the bank had said it expected growth to return to potential, or between 2.0 and 2.5 percent, by the end of this year. Duisenberg has told the European Parliament he could no longer put a date on the recovery. Euro zone hopes for a recovery this year have been dimmed by a looming war with Iraq, which is sapping business confidence and consumer spending. Euro zone inflation stood stubbornly above the ECB's 2 percent target in January and February. Eurostat, the euro zone's statistics agency, revised January's inflation rate up to 2.2 percent from 2.1 percent, while inflation in February rose to 2.3 percent. The European Commission, the executive arm of the European Union, warned the economy could contract by 0.1 percent in the first three months of this year. It added the $7 trillion euro zone economy would grow at least 0.2 percent in the second quarter of 2203, while the economy expanded at its slowest annual pace for nine years in 2002.
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
|
