Paris, Feb. 24 (Bloomberg) -- European Central Bank President Wim Duisenberg signaled he supports an interest rate cut as prospects fade for an economic recovery. Bonds surged as investors expect a reduction as soon as next week. ``The perspective of an economic recovery this year is no longer supported by the most up-to-date information,'' he told a press conference at a meeting Saturday of Group of Seven finance ministers and central bankers. The French and German economies are stagnating as Europe struggles to recover from the slowest expansion in almost a decade. The two countries account for about half the $7 trillion economy of the dozen nations using the euro. Concern about a war in Iraq and a stronger euro are hurting exports. Duisenberg ``looks like he's preparing the ground for a rate cut,'' said Lorenzo Codogno, co-chief European economist at Bank of America Corp. in London. ``It was quite explicit and increases the probability of a half point cut in March.''
European government two-year note yields fell to the lowest levels in at least 13 years. The yield on the German 3 percent note due in December 2004 fell 10 basis points to 2.31 percent at 11:15 a.m. in Frankfurt. The euro fell to $1.0754 from $1.0794 late Friday. A basis point is 0.01 percentage point. Futures trading suggests investors are counting on a quarter- point rate reduction when the ECB's 18 policy makers next meet on March 6. The rate on a euro deposit maturing in March fell 13 basis points today to 2.46 percent.
Convincing Others
The ECB cut its benchmark rate by half a point to a three- year low of 2.75 percent in December. The International Monetary Fund lowered its growth forecast for the euro region to 1.3 percent from 2.3 percent, the Italian treasury said late Friday. German gross domestic product shrank in the fourth quarter after barely expanding since the recession in the second half of 2001. French growth slowed to 0.2 percent as companies such as Alcatel SA and Schneider Electric SA pared investment and output. Duisenberg, who is scheduled to retire in July, may have to convince some of the ECB's 18 policy makers to support a reduction. Bank of Italy Governor Antonio Fazio said after the G-7 meeting that the time may not be right to trim borrowing costs. ``It would be tough to judge at the moment,'' Fazio said. ``The current uncertainties would counterbalance any change in monetary policy,'' he said, referring to the prospect of a U.S.- led war against Iraq. The final 1 1/2 page communique from Friday and Saturday's G- 7 meeting didn't refer directly to the standoff over Iraq, just mentioning ``geopolitical uncertainties.''
Iraq Crisis
Still, ``the prospects for an interest-rate cut have improved'' after Duisenberg's remarks, said Luigi Cammilli, who helps manage 1.7 billion euros ($1.8 billion) for Banca C. Steinhauslin & C. in Florence, Italy. ``The recovery is being held up by this war, and the economy keeps getting worse.'' Philippe Houze, co-chairman of Galeries Lafayette SA, France's largest department store chain, and Dieter Zetsche, chief executive officer of DaimlerChrysler AG's Chrysler unit, are among executives who have said war tensions are an obstacle to business and consumer spending. ``Iraq was the background,'' said Sir Edward George, governor of the Bank of England, which this month cut its key rate to 3.75 percent, the lowest almost half a century.
Stronger Euro
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. A week ago, Duisenberg said the bank would probably lower its growth forecast for the year. 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. The euro's 24 percent gain against the dollar in the past year is helping tame inflation, German Finance Minister Hans Eichel said after the G-7 meeting, even as companies from Siemens AG to Pechiney SA complain it's hurting business abroad. ``A strong euro is certainly in the interest of Europe,'' Eichel told reporters. ``With a view to oil, for example, we're importing much less inflation.'' Brent crude oil, benchmark for two-thirds of the world's oil, has risen almost 60 percent in the past year. The April futures contract rose 2.25 percent on Friday on the International Petroleum Exchange in London to $32.27 a barrel.
Waning Confidence
The prospect of war is hurting some companies. Deutsche Lufthansa AG, Europe's No. 3 airline, said it will cut the number of planes flown in Europe and freeze hiring as a slowing economy and a possible war in Iraq are keeping customers away. Renault SA said its operating-profit margin may decline this year. Western European new-car sales fell 7 percent in January. ``My main concern is that our customers have frozen their investment plans,'' said Alberto Tacchella, chairman of Tacchella Macchine SpA, a maker of grinders that cut gears for carmakers including Fiat SpA and DaimlerChrysler. ``Lower interest rates would help boost confidence, and they may give a companies more room to carry out their investment plans.'' The G-7 comprises the U.S., Japan, France, Germany, the U.K., Italy and Canada. Their economies grew a combined 1.3 percent in 2002 and 0.6 percent in 2001, the worst two-year showing since the energy crisis of the mid-1970s, according to the Organization for Economic Cooperation and Development. //www.quote.bloomberg.com