6 December 2002, 08:57  European Economies: ECB Lowers Key Rate to 2.75%

/www.bloomberg.com/ By Sonja Dieckhoefer
Frankfurt, Dec. 5 (Bloomberg) -- The European Central Bank lowered interest rates for the first time in more than a year, matching a reduction by the U.S. Federal Reserve last month, as economic growth stalls and inflation recedes.
The ECB, which sets monetary policy for the dozen nations sharing the euro, trimmed its benchmark rate by half a percentage point to 2.75 percent, the lowest in three years. The cut is the first since November 2001.
The $7 trillion economy, second in size only to the U.S., may shrink in the first quarter, the European Union's executive branch predicts. Inflation, which has exceeded the central bank's limit of 2 percent for more than two years, slowed for the first time in five months in November.
``It's a step in the right direction, but people shouldn't believe it will solve all of our problems,'' said Heinrich von Pierer, chief executive officer of Siemens AG, whose orders fell this quarter. Germany's biggest manufacturer eliminated 58,000 jobs in fiscal 2002.
Today's reduction means cheaper credit for companies and consumers in a region that's home to 300 million people from Dublin to Helsinki. In the U.K., where growth accelerated in the third quarter, the Bank of England kept its benchmark rate at 4 percent for a 13th month. Sweden's Riksbank pared its main rate by a quarter point to 3.75 percent and Denmark's central bank cut its rate by half a point to 2.95 percent.
Duisenberg's Outlook
Wim Duisenberg, head of the ECB, signaled he won't rush to lower borrowing costs again. Asked at a press conference whether today's cut ``clears the air for some time to come,'' Duisenberg said: ``I can answer that in the affirmative.''
Investors aren't betting on further rate cuts, futures trading suggests. The rate on a three-month euro deposit starting in March fell 5 basis points to 2.8 percent. The rate on the June Euribor contract was 2.85 percent.
Retail sales in the dozen nations sharing the euro plunged 2.1 percent in September and unemployment rose to 8.4 percent in October, the highest in more than two years. Business investment hasn't increased since the third quarter of 2000.
``Downside risks to economic growth have not vanished,'' Duisenberg said. ``Evidence that inflation is easing, owing to the sluggish economic expansion, has increased.''
Matching the Fed
The ECB has lowered rates just four times since the start of last year. The Fed has cut its overnight lending rate 12 times to a 41-year low of 1.25 percent.
``It was almost Duisenberg's moral duty to cut rates,'' said Alberto Marinelli, who helps manage about 450 million euros ($450 million) at Etra Sim in Milan. ``He had to copy the Fed.''
Stocks rose. The Dow Jones Stoxx 50 Index climbed 1.9 percent to 2528.9 at 6:10 p.m. Frankfurt time. The index is down 33.5 percent this year.
The EU's first-quarter economic forecast ranges from a contraction of 0.2 percent to growth of 0.2 percent, compared with an estimated expansion of between 0.2 percent and 0.5 percent between October and December.
Lower interest rates in the U.S. have spurred faster growth. The world's biggest economy, and the destination for about one- fifth of Europe's exports, grew at an annual rate of 4 percent in the third quarter.
The U.K., Europe's second-largest economy and one of three EU members that haven't adopted the euro, grew at the fastest rate in more than two years in the third quarter. Gross domestic product rose 0.8 percent, almost three times as much as Germany and four times as much as France.
Britons Spend
Encouraged by the lowest rates in almost four decades, Britons are borrowing at a record pace to buy appliances, clothes and houses. House prices rose 31 percent in October, the most since 1989.
Germany should combat flagging economic growth by following ``supply-side'' economic policies that ensure ``more flexible'' markets for labor, U.S. Treasury Undersecretary for International Affairs John Taylor said today in a Bloomberg Television interview.
Capital investment in Germany shrank by 1.1 percent in the third quarter. Bankruptcies in Europe's largest economy jumped 16 percent this year and are likely to increase another 11 percent next year, the credit rating company Creditreform said yesterday.
``The ECB could have cut rates a bit earlier,'' Karl Otto Poehl, a former president of the Bundesbank, Germany's central bank, said in an interview. ``It's sometimes a bit timid.''
Inflation Goal
Unlike the Fed, which must try to achieve a maximum amount of employment as well as stable prices, the ECB's primary task is to combat increasing prices. Inflation slowed to 2.2 percent from 2.3 percent in October.
Confidence among the region's consumers has dropped to the lowest in more than five years. Companies from Deutsche Telekom AG to Fiat SpA are firing workers. Alcatel SA, Europe's biggest telephone equipment maker, on Tuesday said it plans to shed an additional 640 jobs.
``I'm rather pessimistic about the economic outlook,'' Holger Haerter, chief financial officer of Porsche AG, said in an interview. ``I don't see strong growth this year and next.''

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