/www.bloomberg.com/ By Farah Nayeri, Katrin Bennhold and Rainer Buergin
Paris, (Bloomberg) -- European Central Bank President Wim Duisenberg said the economy of the dozen states sharing the euro probably won't recover this year, signaling policy makers may reduce interest rates as soon as next month.
``If anything, uncertainties about future developments seem to have increased further,'' Duisenberg told reporters during a meeting of Group of Seven finance ministers and central bankers. ``The perspective of an economic recovery this year is no longer supported by the most up-to-date information.''
The 12-nation economy probably grew the least in a decade last year, and may contract in the first quarter, according to European Union estimates. Duisenberg's comments suggest he'll back a further cut in borrowing costs after the ECB pared its benchmark rate by half a point to 2.75 percent in December.
``Rates will probably come down pretty fast and pretty significantly,'' said Philippe Waechter, chief strategist at Banque Populaire Asset Management in Paris, which manages 56 billion euros ($60 billion.) ``It now looks like he might even cut them next month.''
Futures trading suggests investors are counting on a cut. The rate on a euro deposit maturing in June was 2.37 percent on Friday, indicating a reduction of at least a quarter point in the central bank's key rate by mid-year.
``The ECB was confident recovery would be half a year away: This puts a question mark on that,'' said Holger Schmieding, an economist at Bank of America in London. ``It raises the chance of a half-percent cut in the next two months, with the first instalment already in March.''
The bank's rate-setting council next meets on March 6.
Lehman Cuts Forecast
The ECB will probably reduce its rate by a percentage point to 1.75 percent this year, Lehman Brothers Holdings Inc. said in a note to clients yesterday. Lehman, which cut its growth forecast for the region to 1.1 percent from 1.5 percent, had previously predicted borrowing costs would end the year at 2.25 percent.
The Federal Reserve's benchmark overnight bank lending rate has been at 1.25 percent, a 41-year low, since November. The Bank of England this month unexpectedly lowered its benchmark to 3.75 percent, the lowest since 1995.
The prospect of a U.S.-led war on Iraq may exacerbate Europe's economic slump, as companies put off investing and the euro's 24 percent rise in a year erodes demand for exports by manufacturers including Alcatel SA and Siemens SA.
`Worrying Slowdown'
Lufthansa AG, the German carrier, plans to idle 46 planes, slash investment and suspend hiring as the threat of war cuts air travel. ING Groep NV's profit fell last quarter as it doubled the amount set aside for possible loan losses on corporate borrowers.
``Our economies, though they have not been deprived of our resilience, experience a worrying slowdown,'' said Greek Economy Minister Nikos Christodoulakis, also present at the G-7, whose country holds the European Union's rotating presidency.
Duisenberg indicated that inflation was not a concern and would not stand in the way of a rate cut. ``This weaker outlook should contribute to lower inflationary pressures,'' he said.
Even the ``excessive wage pressures'' of recent years have ``come to a halt,'' he said, dispelling concerns he has voiced in the past about the inflationary impact of rising salaries.
Inflation in the 12 countries was 2.1 percent in January, down from 2.3 percent in December. The central bank aims to cap inflation at 2 percent.
Oil Prices, Euro
The Dutchman painted a bleak picture of the global economic outlook, predicting that ``further turbulence'' in oil markets ``will have a negative impact on world growth.''
Oil prices have surged 60 percent in the last year amid concerns that a war in the Middle East may limit world supply. Rising energy prices push up the cost for companies of making goods, and hamper their ability to invest and hire.
He also said the euro's gains against the dollar are likely to lead to ``further dampening'' of economic growth in the region. The region's three biggest economies -- Germany, France and Italy -- rely on exports to help fuel growth and company investment.