Europe’s Central Bank Cuts Rates
The European Central Bank cut interest rates Thursday for the first time in two years, bowing to mounting international pressure and embracing the view that a global slowdown poses a bigger danger than inflation to the continent’s economy.
The ECB’s surprise decision to lower Europe’s benchmark short-term lending rate by a quarter-point, to 4.5%, comes several months after the U.S. Federal Reserve began slashing rates.
The Fed’s key rate also is 4.5%, but it is expected to reduce that to 4% at its meeting Tuesday.
Until Thursday, the ECB stood alone as the only major central bank that had not eased its monetary policy this year.
Separately Thursday, the Bank of England cut its benchmark interest rate a quarter-point to 5.25%, its third reduction this year.
The ECB’s turnaround came after fresh data showed a sharp fall in jobs and industrial orders in Germany, the economic powerhouse among the 12 European Union nations overseen by the ECB. Europe still expects to post faster growth this year than the United States, but Germany’s bleak prognosis has suddenly cast a pall over those hopes.
Just last month, ECB President Wim Duisenberg declared that Europe would sail along despite the slowdowns in the U.S. and Japan.
But this week, Duisenberg said he told Fed Chairman Alan Greenspan at a meeting of central bankers in Switzerland that he and other members of the ECB’s board were baffled by the erratic course of the global economy. Under that cloud, the bank opted to cut rates rather than risk contributing to a deeper slowdown.
Many analysts were taken aback by the ECB’s move after repeated comments by Duisenberg and other bank members insisting in recent weeks that no rate cuts were likely as long as inflation remained a threat. “Today’s decision is really perverse in light of everything they’ve been telling us over the past month,” said Nigel Anderson, economist at Royal Bank of Scotland.
But others were relieved to see the ECB drop its resistance to rate cuts and display a less rigid attitude in managing monetary policy.
“It’s good news in that they’ve proved they can surprise the markets,” said Paul Horne, economist at Schroder Salomon Smith Barney. “And it may encourage markets to hope for further cuts over the summer if the European economy” worsens.
European stock markets rallied broadly Thursday on the news, with the German market up 1.7%, the British market up 1.2% and the Dutch market up 3.1%.
Duisenberg emphasized that inflation remained a cause for concern because of higher food costs, the surge in oil prices and the slide of the euro against the dollar. He and other ECB members said they would remain vigilant about defending the euro’s value and warned that Thursday’s cut did not necessarily presage a series of reductions.
The euro, whose value has fallen nearly 30% since its birth in January 1999, rose above 90 U.S. cents Thursday before settling back to register a small drop against the dollar.
