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ECB ready for big rate move
LONDON, England (CNN) -- The European Central Bank may be forced to cut interest rates this Thursday as the euro's strength hits exporters and growth. But a debate is raging over how deep that cut could be as European politicians step up calls for the central bank to revive growth in the 12-nation eurozone. The German economy -- the zone's biggest -- has stumbled into a recession and faces deflation. "We say the economic fundamentals in Euroland still warrant a half-point cut, which now seems the majority view in the market," David Brown, chief European economist at Bear Stearns, said in a note to investors. The latest poll from Reuters of 57 economist, shows 35 central bank watchers expect the ECB to cut rates by 0.5 percentage points. The ECB, which sets interest rates for the 12-nation eurozone, has left the cost of borrowing at 2.5 percent since March. And the Bank of England is expected to leave interest rates at 3.75 percent when it meets on Wednesday, its lowest since 1955. (Full story) The BoE will announce its decision midday Thursday London time, and the ECB will follow 45 minutes later. All eyes will be on the ECB as various members of its rate-setting committee have said the euro's 13 percent rise against the dollar this year is no hindrance to growth but as inflation falls there is room for a rate cut. There is little doubt that the euro's strength will hamper exporters and cut the cost of imports, which economists believe would lead to deflation --- a vicious cycle of falling demand, output and prices -- in Germany. ECB Chief Economist Otmar Issing has added to markets' expectations of a rate cut, saying inflation was on a clear downward track. "It is absolutely clear that the slowing inflation is linked to the euro's strengthening, and with this the monetary policy room for maneuver has also changed," Issing told a Finnish newspaper on Wednesday. Consumer prices in April fell 2.1 percent from 2.4 percent in March, and declining oil prices coupled with the euro's strength is likely to moderate prices further in coming months. The ECB has an inflation ceiling of 2 percent. Politicians have been frustrated by the ECB's inaction to revive the economy, and even the bank's president Wim Duisenberg in April scaled down forecast growth to no more than one percent this year. French unemployment rose to its highest level in almost three years in April, while German dailies Bild Zeitung and Die Welt reported on Friday, German unemployment rose in May. The numbers are officially released next week. Belgian Prime Minister Guy Verhofstadt has joined French and German officials in calling for lower rates. "It is the task of every government, including the European Central Bank, to adopt measures to stimulate the economy," he said. German Economy Minister Wolfgang Clement said: "The ECB knows it has room to maneuver."
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