[PEN-L:32816] ECB rate cut: trying to save Germany?

["Ian Murray" <seamus2001@xxxxxxxxx>]

Rate relief for Europe

Half-point reduction to save German economy after year-long wait

Larry Elliott and Mark Milner
Friday December 6, 2002
The Guardian

Europe's central bank yesterday cut interest rates for the first time for more than a year
as it sought to prevent Germany from sliding into a full scale recession.

Wim Duisenberg, president of the European Central Bank, said concern about the
sluggishness of the economic performance of the 12 nation eurozone had prompted the half
point reduction to 2.75%.

"Our decision should ... help to improve the outlook for the euro area economy by
providing a counterweight to some of the existing downside risks to economic growth,
thereby supporting confidence."

The move will provide a partial answer to critics who have argued that the central bank
has been too cautious. They claim it has focused too much on its inflation ceiling of 2%
at a time when the eurozone's leading economy, Germany, has been struggling and where
unemployment has reached a five-year high.

The International Monetary Fund which, along with many forecasters, has been predicting
slower growth in the eurozone both this year and next praised the decision.

"We welcome the action taken by the ECB this morning, which is in line with what we have
indicated and recommended, given what we see as both receding inflation prospects and a
weaker economy," IMF spokesman Tom Dawson said.

Germany's chancellor Ger hard Schröder also welcomed the move but made it clear he
believed the ECB should have acted sooner.

"It is an important signal of economic policy, especially now. It has been expected for a
long time but now it has happened, with the freedom and sovereignty of the ECB. I believe
this will contribute to a revival of economic activity not only in Germany but across
Europe."

However some analysts said the reduction underlined the difficulties of a
one-size-fits-all interest rate policy with borrowing costs now too low for some
countries.

Holger Fahrinkrug, senior economist at UBS Warburg in Frankfurt said the ECB was clearly
aiming to boost confidence, adding that by cutting rates yesterday, "I think they are
making a contribution".

"But it does not solve the problem of the one-size-fits-all policy. For Germany interest
rates are still too high, but for other countries they are too low."

Nick Parsons, chief currency strategist at Commerzbank, said: "I think there is another
cut coming, but the ECB will wait for evidence rather than basing its decision on
forecasts. The danger is that the ECB will always be accused of being behind the curve."

The ECB's move comes a month after the US Federal Reserve acted to help the world's
largest economy through a "soft spot", but still leaves rates in the eurozone 1.5
percentage points higher than those in the US.

Mr Duisenberg stressed yesterday that the ECB had done enough to underpin growth in the
eurozone, and urged member states to do their part by tackling budget deficits and
embarking on structural reform of their economies.

"We note with some concern the slow progress in many euro area countries and call on
governments to take determined action." He called for speedier action to free up labour,
product and financial markets, arguing they were vital to economic growth.