22 October 2001, 13:27  ECB May Lower Rates This Week, Some Economists Say

Frankfurt, Oct. 22 (Bloomberg) -- European Central Bank council member Jean-Claude Trichet suggested on Thursday he isn't worried about economic growth. The next day, Valeo SA said it will close 12 car-parts plants and cut as many as 5,000 jobs. On Friday, council member Ernst Welteke said Germany won't sink into recession. Hours earlier, the Ifo research institute said business confidence posted its biggest fall last month in almost three decades. ``We're approaching a crisis,'' Jean-Pierre Rodier, chairman of Pechiney SA, the fourth-largest aluminum producer, told reporters. ``A rate cut is necessary.'' Twelve of the 22 economists surveyed by Bloomberg News predict the ECB will lower its benchmark interest rate by at least a quarter point from 3.75 percent when policy makers meet on Thursday. Members of the rate-setting panel suggested last week they're in no hurry to reduce borrowing costs. The bank's mandate is to keep the inflation rate below 2 percent, a goal it has missed for 16 months. The risk of doing nothing is that the economy will shrink. Germany's economy didn't grow at all in the second quarter. The Dow Jones Stoxx 50 Index has declined about 25 percent this year. French consumer spending probably fell 1 percent in September, the biggest decline in more than a year, economists expect a report tomorrow to show. Executives of small French businesses were more pessimistic than at any time in the past four years, an IDSI Novaction institute survey showed today.
Schroeder, Jospin
German Chancellor Gerhard Schroeder and French Prime Minister Lionel Jospin increased pressure on the bank to pare rates at a meeting of European leaders in Belgium last Friday. ECB policies ``can always be improved upon,'' Schroeder said. Jospin said it's important for the bank ``to exploit the margin for maneuver'' as the economy slumps after terrorist attacks in the U.S. Both men face elections next year. The central bank has resisted calls from politicians to cut rates. ECB President Wim Duisenberg said at the European leaders' meeting that he will only lower rates again if inflation slows further and faster than currently expected. ``We do what we think is technically correct and not what might be most gratifying or politically popular,'' ECB executive board member Eugenio Domingo Solans said Friday. Investors expect the bank will trim the price of money, futures trading suggests. The yield on the three-month Euribor interest rate futures contract maturing in December was 3.37 percent on Friday, 38 basis points below the ECB's rate. ``We've seen in the past that even after saying one thing on the eve of a meeting, they could do the opposite the following day,'' said Eric Dubos, head of fixed-income at Groupe Robeco Gestion in Paris, which manages 3 billion francs ($411 million).
German Inflation
The ECB has lowered rates three times this year, most recently on Sept. 17, by half a point to 3.75 percent. The U.S. Federal Reserve reduced rates nine times and the Bank of England six times. Unlike the Fed, which also has a mandate to spur employment, the ECB's chief goal is combating inflation. European consumer prices rose 2.5 percent from a year ago in September, down from 2.7 percent in August. The inflation rate peaked at 3.4 percent in May. Germany's inflation rate probably slowed to 2 percent from a year ago in the four weeks to mid-October, from 2.1 percent in September, economists said. The figures are released this week. France's inflation rate in September was 1.6 percent. ``The economic case for lower rates is pressing enough to allow the ECB to reduce rates without being seen to cave in to political pressure,'' said Rainer Guntermann, an economist at Dresdner Kleinwort Wasserstein in Frankfurt.
Job Losses
Companies in the dozen nations sharing the euro have said this year they plan to fire about 208,000 people, according to a tally of announcements. Siemens AG said a week ago it will eliminate 7,000 jobs, bringing the total this year to 17,000. Commerzbank AG got by for 131 years without firing people to boost profits. The bank last week said it will cut 3,400 jobs. The ECB would be ``very late to cut, but better late than never,'' said Jean-Marie Legrand, who manages about 2 billion francs at International Capital Gestion in Paris. ``They're not as mature as the Greenspan crew, maybe they need more experience,'' said Legrand. ``Then again, you don't need that much experience to realize rates need to come down.''

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