By Christian Baumgaertel
Frankfurt, Feb. 14 (Bloomberg) -- European Central Bank policy makers are moving closer to lowering interest rates as companies pare production and unemployment rises.
Five of the ECB's 18 council members from President Wim Duisenberg to Ireland's John Hurley said risks have increased the economy will grow less than they expected. The ECB council kept borrowing costs at a three-year low of 2.75 percent last week.
``I expect a cut in March or April at the latest,'' said Luigi Buttiglione, head of European economics at Barclays Capital Plc in London and a former economist at the Italian central bank. ``For the time being we're talking about stagnation'' in Europe's economy. ``With war, it may contract.''
Industrial production in France and Germany, the biggest economies of the dozen nations using the euro, fell in December, and German unemployment rose to a 4 1/2-year high last month. Western European new car sales fell in January and Havas SA, the world's sixth-largest advertising company, said fourth-quarter revenue dropped by almost a quarter.
``It now seems certain that growth in 2003 will be lower than we thought'' in December, when the ECB last pared rates, council member John Hurley said on Feb. 12. Should inflation slow further as a result, the bank would have ``room for maneuver on interest rates,'' Hurley added. `Downside Risks'
Investors expect the ECB to lower borrowing cost in the next two months, interest rate futures trading suggests. The rate on a three-month euro deposit maturing in April was 2.44 percent yesterday, compared with a money market rate of 2.71 percent.
The economy in the dozen euro nations probably grew 0.8 percent in 2002, the slowest pace in almost a decade, and may have contracted in the first quarter, the European Union said.
``There remain downside risks to the outlook for euro area economic activity,'' the ECB said yesterday in its monthly report. So far, the bank still expects a ``gradual'' acceleration to growth ``close to'' between 2 percent and 2.5 toward the end of the year, the report said.
Duisenberg last week said risks to growth ``have been exacerbated since'' the central bank reduced borrowing costs by half a point in December. The reason it didn't lower interest rates further is because it would have drowned in ``a sea of uncertainty'' about the threat of a U.S.-led attack on Iraq.
U.S. President George W. Bush has vowed to overthrow President Saddam Hussein's regime should Iraq refuse to disarm. The U.S. and U.K. are massing about 225,000 troops in the Persian Gulf for a possible attack on the Arab country.
Concern About Iraq
U.S. Federal Reserve Chairman Alan Greenspan said on Feb. 11 the threat of war ``is hanging very heavily on economic decision making and thus economic growth.'' The U.S. economy, which buys about a fifth of Europe's exports, grew 2.4 percent last year.
Concern about Iraq has contributed to a 24 percent appreciation of the euro against the dollar in the past year. Companies from Germany's Siemens AG to Air Liquide SA, the world's largest maker of industrial gases, have said the stronger euro is hurting business.
While the currency's gain ``may contribute to damping export growth to some extent,'' exports should ``benefit from the expected recovery of the world economy,'' the ECB said yesterday. It also helps to slow inflation.
The central bank said it expects inflation to ``fall and eventually stabilize'' below its 2 percent limit this year.
``Weak'' economic growth is helping to damp price increases, ECB council member and Bundesbank President Ernst Welteke said on Feb. 10. Neither wage gains nor the growth in M3 money supply, a gauge of future inflation, are a threat to the bank's objective of keeping inflation below 2 percent.
Inflation slowed to 2.1 percent in January from 2.3 percent in December. Oil costs have gained more than 40 percent since mid- November, to about $33 per barrel of Brent crude.
Tame inflation means ``there can be room for monetary policy decisions and measures which can help support economic activity,'' ECB Vice President Lucas Papademos said on Feb. 7 at a conference in Athens.