Brussels, March 24 (Bloomberg) -- European Central Bank Chief Economist Otmar Issing said the Iraq war alone won't prompt cuts in interest rates, playing down ``exaggerated'' expectations of what the ECB can do to avert a contraction. Calling the impact of the war on the economy ``difficult to prejudge,'' Issing said the bank's quarter-point cut in its main rate to 2.5 percent earlier this month leaves European borrowing costs at ``very low levels.'' The ECB ``will contribute to strengthening confidence,'' Issing told the European Parliament's economic and monetary affairs committee. ``But it also means cautioning against exaggerated expectations.''
The European Commission last week cut its economic growth forecast for 2003 to about 1 percent from 1.8 percent and said the central bank may need to reduce interest rates to prevent war from tipping Europe into recession. Issing said the ECB ``stands ready to act,'' echoing a statement made by ECB President Wim Duisenberg last week, though he added the phrase referred to the provision of additional liquidity if needed. The bank can't base its interest rate ``decisions on such volatile information'' as the oil price or daily ``news from the military front,'' Issing said. ``Issing wants to damp expectations of another reduction without ruling out that option,'' said Stephan Rieke, an economist at ING BHF-Bank AG in Frankfurt. ``More than a quarter-point cut is not in the pipeline, and even that will take time.''
`Very Modest' Growth
Investors have scaled back rate cut expectations, interest rate futures trading shows. The rate on a three-month euro deposit maturing in June was 2.38 percent at 5:32 today, compared with 2.24 percent two weeks ago. Germany's 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, said the commission, the EU's executive arm.
``We now expect only a very modest rate of economic growth this year,'' Issing said. Belgian business confidence fell in March to the lowest since the Sept. 11 attacks in 2001, the Belgian central bank said today. The bank's business optimism index fell to minus 16 from minus 8.9 in February. Analysts predicted a reading of minus 9.5. The survey was conducted mostly before the war started last week.
Oil Prices
Economists see the Belgian survey as an important indicator because about three-quarters of its exports are to European Union countries, it's home to Europe's second-largest port, Antwerp, and it has chemical makers such as Solvay SA that supply manufacturers elsewhere. U.S. and U.K. forces have secured major oil fields in southern Iraq, lessening the risk of supply disruptions. Brent crude oil fell 22.4 percent last week to $24.35 a barrel. The contract for May delivery traded at $25.50 at 3:28 p.m. today on the International Petroleum Exchange in London. Stock markets pared some of last week's gains today, with the Dow Jones Stoxx 50 dropping 4.6 percent to 2202.61 as of 4:21 p.m. London time. The Stoxx 50 gained 8.5 percent last week and the Dow Jones Industrial Average jumped 8.4 percent, the biggest gain in 20 years. While the ECB is prepared ``day and night'' to lend extra money to banks to keep markets functioning as it did after the Sept. 11 attacks on the U.S., Issing said he doesn't expect the Iraq war to paralyze the markets.
Inflation Outlook
The drop in oil prices may bring down inflation, which rose to an 11-month high of 2.4 percent in February. The ECB has missed its target of keeping inflation at 2 percent or below since August. ``If oil prices normalize in future as expected by markets, the most likely outcome will be that inflation will fall below 2 percent in the course of 2003 and remain at levels consistent with price stability,'' Issing said. A measure of inflation that excludes food and energy prices shows that underlying cost-of-living pressures are subsiding. The ``core'' inflation rate stayed at 1.9 percent in February, the lowest since August 2001. //www.quote.bloomberg.com