Brussels, March 17 (Bloomberg) -- The European Commission cut its economic growth forecast and called on central bankers to reduce interest rates in case a war against Iraq deals a further blow to consumer and business confidence. The euro region will grow about 1 percent in 2003, down from an earlier forecast of 1.8 percent and close to the nine-year low of 0.7 percent in 2002, the commission said. A recession is a ``worst-case scenario.'' ``Growth in the euro area has turned out to be significantly weaker than anticipated,'' Monetary Commissioner Pedro Solbes said in the commission's quarterly economic report. ``In the event of a conflict in Iraq, monetary policy could be used to respond to a possible collapse in confidence.''
The ECB cut its benchmark interest rate by a quarter point to 2.5 percent on March 6 as consumer confidence tumbled to the lowest in more than six years. Another quarter-point reduction would take borrowing costs in any euro country to the lowest since at least 1948. The German economy, Europe's largest, stagnated in the last quarter of 2002. French exports fell to the lowest in more than a year in January. The 12-nation euro economy may shrink in the first quarter, the commission, the European Union's executive arm, says.
U.S. Rates
The ECB has trimmed the cost of money six times since the start of 2001, half as often as the U.S. Federal Reserve, which has lowered its overnight lending rate to a 41-year low of 1.25 percent. The Fed is likely to leave that rate unchanged tomorrow, according to 56 of 65 economists polled by Bloomberg News. The U.S. economy expanded at an annual pace of 1.4 percent in the final three months of 2002, twice as fast as the European economy. Falling equity markets and tumbling company profits are hurting the economy, the commission said. Last Wednesday the Dow Jones Stoxx 50 Index fell to its lowest level since January 1997. The index rose 2.8 percent to 2137.59 at 4:55 p.m. Brussels time today. ``The ECB has room for more rate cuts, whether there is a war in Iraq or not,'' said Ulrich Kater, an economist at Dekabank AG in Frankfurt and co-author of a 2002 book on the ECB. Kater said the bank may lower rates as much as a half point should war break out. Investors expect another reduction in the first half. The rate on the three-month euro deposit maturing in June is 2.39 percent, compared with a three-month money market rate of 2.56 percent. A basis point is 0.01 percentage point.
Political Pressure
The central bank, keen to demonstrate its independence, has balked at political pressure before. President Wim Duisenberg said ``I hear but do not listen'' when the bank snubbed calls for rate cuts in April 2001. Solbes's appeal is ``a good indication that political pressure is mounting on the ECB to ease further,'' said Thorsten Polleit, an economist at Barclays Capital in Frankfurt and a member of the ECB Observer, a group that monitors the bank. The ``core'' inflation rate -- which strips out rises in energy and food prices -- dipped below 2 percent in January for the first time since September 2001. ``Core inflation is on a downward trend,'' Solbes said. The ECB declined to comment on Solbes's remarks. The bank aims to limit overall price increases to 2 percent, a goal it has missed for the last seven months.
Oil Prices
A reduction could be ``complicated'' by a surge in oil prices, now 37 percent higher than four months ago, the commission said. Inflation accelerated to 2.3 percent in February from 2.2 percent the month before. The ECB has said the euro's 22 percent gain against the dollar in the past year and sputtering growth are damping price increases. The central bank expects inflation to drop below 2 percent in the course of the year. Duisenberg said earlier this month that the bank has lowered its 2003 growth forecast to about 1 percent from as much as 2.1 percent. The commission will put out its detailed forecasts on April 8. ``The governing council remains alert and stands ready to act decisively and in a timely manner,'' Duisenberg said on March 6, following the bank's decision to lower borrowing costs. The euro's rise is hurting the cost competitiveness of exporters, though the current level doesn't ``seriously undermine'' business, said Klaus Regling, Solbes's deputy. Exporters would be in worse shape without the euro since 12 different currencies would be fluctuating against each other, he said.
Deficits
Governments, restricted by the stability and growth pact that limits budget deficits to 3 percent of gross domestic product, have ``not much room for maneuver'' to boost the economy through increasing spending or cutting taxes, the commission said. Germany and France overstepped the limit last year, subjecting them to closer monitoring under the EU's ``excessive deficit'' procedure that, in theory, could eventually lead to fines. Germany ran up a deficit of 3.6 percent in 2002, while France's deficit was 3.1 percent, official EU statistics showed today. Only two of the 12 euro countries had a surplus last year. //www.quote.bloomberg.com/