Brussels, Dec. 3 (Bloomberg) -- European Central Bank President Wim Duisenberg predicted inflation will slow as the economy barely grows, signaling he will support a cut in interest rates as soon as Thursday. ``Since our last meeting, the evidence has strengthened that inflationary pressures are easing somewhat and downside risks to economic growth have not vanished,'' Duisenberg told the European Parliament's economic and monetary committee. The central bank has denied companies and consumers cheaper credit for the past year, making the fight against inflation its priority as growth in the $7 trillion economy slows to a nine-year low and unemployment climbs.
Europe's economy will expand 0.8 percent in 2002, the weakest pace since the 1993 recession, the European Commission predicts. KarstadtQuelle AG, Germany's largest department-store operator, said sales on the first weekend of the holiday shopping season fell short of last year's levels. After the bank's last meeting, on Nov. 7, Duisenberg said an ``extensive discussion'' failed to produce a consensus for a rate reduction -- indicating for the first time divisions among the 18 members of the policy-setting council. Since then, at least 10 ECB officials, from Spain's Jaime Caruana to Belgium's Guy Quaden, have suggested they will vote for lower rates when the council meets on Thursday.
`Clear Signal'
Investors expect a cut, futures trading suggests. The yield on the three-month Euribor contract due in December fell 1 basis point to 2.92 percent, more than a quarter point below the ECB's benchmark rate of 3.25 percent. The March contract yielded 2.84 percent. ``It's about as clear a signal from a central banker as you're ever likely to get: they're going to cut'' on Thursday, said Martin Bayntun, who helps oversee about $10 billion in bonds at Gartmore Investment Management in London. ``I'd be amazed if they didn't.'' All except three of the 30 economists surveyed by Bloomberg News expect a reduction on Thursday, with 22 predicting a half- point cut. Duisenberg gave no clues as to the size of any cut on Thursday, analysts said. ``It remains difficult to predict at this juncture the timing and the strength of the acceleration of economic activity,'' Duisenberg said today. Buhrmann NV, the world's largest distributor of office supplies, said today it will cut 1,100 jobs to reduce costs, in addition to the 5,000 positions that have been eliminated in the past two years.
Fighting Inflation
The ECB has lowered borrowing costs four times since the start of last year and hasn't touched them since November 2001. The U.S. Federal Reserve has pared its overnight lending rate 12 times in the same period. The Fed last month cut its rate by half a percentage point to 1.25 percent, the lowest in 41 years. Unlike the Fed, which also has a mandate to spur employment, the ECB's sole task is to combat rising prices. Inflation receded for the first time in five months in November, to 2.2 percent from 2.3 percent in October. The rate is likely to decline below the ECB's 2 percent limit early next year, the commission said. Inflation ``should fall again and, provided that oil prices do not increase significantly and that wage moderation prevails, reach levels in line with our definition of price stability in the course of 2003,'' Duisenberg said. Still, he voiced disappointment that the bank will fail for the third year in 2002 to keep inflation below the limit and said a surge in oil prices or wages could throw it off track again next year. Consumer price increases will exceed 2 percent ``for quite some months to come,'' he said.
The German economy, Europe's largest, barely grew for a third quarter. Unemployment rose to the highest in almost four years in October. Deutsche Telekom AG, the former national phone monopoly, this month posted Europe's biggest quarterly loss.
Widening Deficits
The central bank has also attributed its refusal to reduce borrowing costs on governments' questioning the ``stability pact'' that limits budget deficits in order to instill confidence in the euro. Deficits are widening in Germany, France and Italy, which account for three-quarters of the economy. Germany in 2002 will become the second country to top the deficit limit of 3 percent of gross domestic product, after Portugal last year. Duisenberg supported the commission's proposals to fix the pact, backing a new requirement that the four governments still running deficits -- Germany, France, Italy and Portugal -- pare their shortfalls by 0.5 percent of GDP. ``If adopted and lived up to, that gives me reason to express some confidence in the future,'' Duisenberg said. At the same time, he said, cuts in budget deficits do not automatically translate into lower interest rates.
The commission is trying to build flexibility into the pact, which its president, Romano Prodi, criticized as ``stupid'' in October. Under a proposal last week, countries with low debt would have more leeway to run annual deficits. That would ease the pressures on Germany and increase them on Italy, Europe's most debt-laden country. //quote.bloomberg.com