Expectations of rate cut up in ECB monthly report

In its report for October, the ECB used language that pointed more strongly towards an early rate cut than did remarks last week by Wim Duisenberg, the bank president.

Mr Duisenberg, speaking after an ECB council meeting in Vienna, surprised eurozone finance ministers by stating that the bank had "very little room for manoeuvre" to cut interest rates to combat what both sides recognise as the region's worst economic downturn since the euro's launch in 1999.

The ECB monthly report did not use Mr Duisenberg's phrase and concentrated instead on describing the brighter inflation outlook and the possibility of a delayed economic recovery.

"Last month's terrorist attacks had an immediate negative impact on economic activity and confidence, which could delay the resumption of higher economic growth," the ECB said.

"Evidence collected before 11 September, including surveys on business and consumer confidence, did not point to an early recovery... Recent developments strengthened tendencies towards lower rates of inflation that were already prevailing before."

Economists said the report indicated there was little doubt that the 18-member ECB council would soon reduce the bank's main interest rate, now at 3.75 per cent.

"We think this is yet another dovish editorial that takes the spike out of some of Duisenberg's comments last week, and is clearly consistent with further cuts in interest rates in coming months," commented Neville Hill of Credit Suisse First Boston.

The ECB council's next two meetings are on October 25 and November 8. Many economists think the bank will wait until November 8 before acting, partly because a rate cut next week might seem to contradict Mr Duisenberg and leave the ECB open to the charge of inconsistency.

According to some economists, senior officials at several national central banks in the eurozone were disappointed by Mr Duisenberg's tone, which they said had not conveyed the full flavour of the ECB council's discussions in Vienna.

The council had been more open to signalling that an early rate cut was possible than he had suggested, they said.

Gerhard Schroder, German chancellor, reacted to the ECB's decision not to cut rates last week by questioning whether the bank had yet "reached the peak of common sense".

But Mr Schroder's own problems were highlighted yesterday by the Bundesbank, whose chief economist, Hermann Remsperger, warned the government not to adopt a policy of fiscal expansion to fight the slowdown.

Mr Remsperger said that, even without a new fiscal stimulus, Germany's budget deficit would rise above 2 per cent of gross domestic product this year. This was too close to the 3 per cent limit set by the European Union's stability and growth pact, which Mr Remsperger described as vital for maintaining confidence in eurozone fiscal and monetary policy.

Click the link on the right to read the ECB Monthly Report, October 2001.