Frankfurt, Nov. 11 (Bloomberg) -- The European Central Bank, by passing up an opportunity to cut interest rates last week, left the burden of reviving world growth resting on a sputtering U.S. economy, analysts said. That's a tall order. ``The Europeans are counting on the U.S. to be the locomotive for the world economy, but at this point the U.S. economy is operating mainly on fumes,'' said Ed Yardeni, chief investment strategist for Prudential Securities in New York.
The ECB declined to match last week's half-point rate reduction by the U.S. Federal Reserve, analysts said, because the bank's mandate is to contain inflation and because its officials don't want to be seen following a U.S. lead. ECB President Wim Duisenberg also has criticized widening budget deficits in such countries as Germany and France for their inflationary potential. ``The U.S. is pro-business and in Europe they simply don't care,'' said Guido Van der Schueren, chief executive officer of Gent, Belgium-based Artwork Systems Group NV, which makes software for the printing industry and has offices on both continents. ``My feeling is, they don't want to be involved.''
The ECB's no-change decision and a similar vote by the Bank of England last week followed a larger-than-expected half-point reduction in the Federal Reserve's benchmark rate to 1.25 percent, leaving the rate for the 12 nations sharing the euro 2 points higher. With rates already near record lows in most Asian nations, the onus to lift the world economy is on the U.S.
Investors
There's some doubt the Fed's latest cut can even do the job at home. The U.S. central bank has been unable to reignite business investment, which declined in six of the eight quarters since the Fed began cutting rates in a dozen moves starting in January 2001.
``Investors are cautious and business is unwilling to take risks,'' said Ian Morris, economist at HSBC Securities USA in New York. ``These are classic post-bubble symptoms that are likely to remain over the next couple of years. The U.S. recovery is likely to hit trouble in 2003.''
Investors read the size of the Nov. 6 Fed rate cut as a sign the U.S. economy may be in worse shape than they knew. They pushed the Standard and Poor's 500 Stock Index down 3.2 percent in the final two days of last week. Benchmark 10-year U.S. Treasury securities rose, pushing the yield down 18 basis points for the week to 3.86 percent, within 30 basis points of a 44-year low. A basis point is 0.01 percent. The dollar weakened 1.6 percent against the euro last week to $1.0129 in New York, the third straight weekly decline against the euro and yen.
The dollar fell to 119.28 yen at 10:39 a.m. in London today from 119.84 Friday in New York on concern that U.S. stocks will decline and that a possible strike on Iraq will slow the economy.
No Coordination
The euro's gains may be short-lived if investors see the U.S. is growing more rapidly than the European Union and therefore likely to produce bigger returns, said Don Alexander, senior currency economist at Brown Brothers Harriman & Co. ``The rate-differentials are driving things now,'' he said. ``That won't always be the case.''
The U.S. economy already is growing faster than the euro countries. The International Monetary Fund forecast in September that the economy of the 12 nations sharing the euro will grow by 0.9 percent this year, compared with 2.2 percent for the U.S. The European Commission now predicts the region's growth rate will drop below 1 percent this year.
The decision also dashed hopes by some investors that the Fed and the ECB might coordinate rate cuts. Paul McCulley, who oversees about $90 billion at Pacific Investment Management Co. in Newport Beach, California, predicted Nov. 1 that the ECB would follow a Fed cut ``in an all-out pre- emptive war on deflation.'' Pimco was buying German bonds to back up its bet.
`Unnecessarily Reluctant'
``The markets had been hoping that there was some kind of dialogue among central bankers around the world, and this makes it clear there isn't,'' said Philippa Malmgren, former White House economic strategist now head of the Canonbury Group, an investment advisory group in Washington and London.
The Fed's rate cuts have helped U.S. automakers better afford the no-interest loans that spurred sales since last year's terrorist attacks. Companies who have factories, sell products or offer securities on both continents are affected by decisions made by both central banks. ``It has been clearly beneficial, extraordinarily helpful to us,'' said Van Jolissaint, chief economist at DaimlerChrysler AG's Chrysler group, the No. 3 U.S. automaker. ``The ECB is sitting back and waiting for the U.S. to be the single engine to pull the world economy. The ECB is being unnecessarily reluctant to lower rates.''
ECB's Mandate
Duisenberg has said inflation will take longer to get below its 2 percent target than the bank previously estimated, and that inflation across Europe, measured at 2.2 percent in October, still exceeds the central bank's 2 percent target. Some investors suspect other motives.
``They didn't want to be seen giving in to pressure or following in the footsteps of the Fed,'' said Michael Schoeck, who manages $12 billion as head of international equity investments for State Street Global Advisors in Boston. For his part, Duisenberg said after the rate decision that the ECB followed its own strategy based on containing prices, ``not pressure from politicians or markets.''
The Bank of England may have less reason to cut rates: The U.K.'s economy is growing more rapidly. U.K. house prices rose at their fastest monthly pace on record in October. The British economy grew 0.7 percent in the third quarter compared with the previous three months. That's more than twice the pace at which Germany grew in the first two quarters.
Pushing for Action
Duisenberg disclosed that at least some of the bank's 18 policy makers may be pushing for prompt action. ``The governing council has discussed extensively the arguments for and against a cut,'' the ECB president said Nov. 7. While the panel kept rates unchanged this time, it ``will monitor closely the downside risks to economic growth in the euro area.''
Investors are betting the Fed has made its last rate reduction for now and that the ECB will pare rates, perhaps as soon as its Dec. 5 meeting. The April 2003 Fed Funds futures contract pegs the month's average rate at 1.23 percent, essentially unchanged, and contracts beyond April show expectations of a quarter-point increase. The yield on the three-month Euribor contract maturing in March fell 1 basis point today to 2.83 percent, more than a quarter point below the ECB's benchmark rate of 3.25 percent.
Stock Slide
The Fed's actions haven't made it easier for all companies to borrow money or helped pull the U.S. stock market out of a slide that began in mid-2000, analysts said. The Standard & Poor's index of 500 corporate stocks, a broad measure of stock market performance, has fallen by almost 22 percent since the start of this year, reflecting continued investor pessimism, HSBC's Morris said. The cost to sell non- investment grade bonds rose to an all-time high above Treasuries of comparable maturities earlier this year as investors grew concerned about the ability of companies to repay debt.
``The Federal Reserve is impotent,'' said Bruce Bent, who started the first money-market mutual fund in 1970 and is chairman, CEO and founder of Reserve Management Corp. With instant worldwide communications, ``you no longer have an American marketplace -- it's international. The Federal Reserve simply doesn't have the knowledge or power that they had 20 or 30 years ago.'' //www.quote.bloomberg.com