/www.bloomberg.com/ By John Fraher
Frankfurt, March 6 (Bloomberg) -- The European Central Bank may today reduce interest rates to the lowest since at least 1948, when Europe first received money from the Marshall Plan, in a bid to prevent the $7 trillion economy from shrinking, economists said.
Fourteen of the 25 economists surveyed by Bloomberg News expect the ECB to lower its benchmark rate by a half point to 2.25 percent. Another five predict a quarter-point cut. The Bank of England, whose policy makers also meet today, will keep its rate at a 48-year low of 3.75 percent, analysts said.
The euro region's economy may contract this quarter after growing at the slowest pace in almost a decade last year, the European Union said. The threat of a war in Iraq is prompting consumers and companies to pare spending. Unemployment is the highest in almost three years. ECB President Wim Duisenberg two weeks ago abandoned his forecast for a recovery this year.
``At best, the economy is stagnating,'' said Luigi Buttiglione, a director of Barclays Capital Plc and a former economist at Italy's central bank. ``There are no reasons not to cut and not to cut aggressively.''
The ECB will announce its decision at 1:45 p.m. in Frankfurt and hold a press conference 45 minutes later. The Bank of England will publish its decision at noon in London.
Outlook Dimming
Expectations among economists of a rate cut have increased in the past month, interest rate futures trading shows. The rate on a three-month euro deposit maturing in March has dropped to 2.41 percent from 2.66 percent a month ago.
The outlook for region's economy, which stretches from Dublin to Athens, has dimmed since the ECB last lowered rates in December. Services, the largest part of gross domestic product, shrank for the first time in five months in February and French consumer confidence fell to the lowest since 1997.
Porsche AG has cut production of its 911 and Boxster models amid sluggish growth. CRH Plc, Europe's third-biggest maker of building materials, said on March 4 it expects demand in the U.S., Germany and France to stagnate or decline this year.
The ECB has lowered rates just five times since the start of 2001. The U.S. Federal Reserve pared its overnight lending rate 12 times to a 41-year low of 1.25 percent in the same period. The Bank of England cut rates eight times, to the lowest since 1955.
Consumer Pessimism
U.K. consumer spending helped Europe's second-largest economy grow 1.7 percent last year, faster than the average of about 0.8 percent in the euro area. Slowing growth in service industries, worsening consumer confidence and a decline in manufacturing suggest the Bank of England will probably lower rates again in coming months, economists said.
``Services, one of the mainstays of the economy, is weakening; that will create problems going forward,'' said George Buckley, an economist at Deutsche Bank AG in London. Deutsche, the only bank surveyed by Bloomberg News to predict last month's cut, expects another rate reduction in April or May.
Of 36 economists surveyed by Bloomberg News last week, 22 expected the U.K. central bank to trim rates by June. Marian Bell, one of nine policy makers, said last week she sees room for ``fairly significant'' reductions to keep the economy growing.
Growth in Europe may not be bolstered by the U.S. economy, which buys about a fifth of the region's exports. Consumer confidence in the world's largest economy last month dropped to the lowest since September 1993. Manufacturing expanded at the slowest pace in three months in February.
Euro Hurting Exports
The euro's 26 percent appreciation against the dollar in the past year is also hurting growth, making goods by exporters such as Schering AG, a maker of birth-control pills, and Alcatel SA of France more expensive. The euro rose to a four-year high of $1.1001 against the dollar yesterday and traded at $1.0966 at 6:34 a.m. Frankfurt time.
``It's a drag on the economy, especially if it goes on,'' said Conrad Mattern, chief economist at Activest Investment in Munich, which manages 44 billion euros ($48 billion). ``It's another reason for the ECB to cut rates. Exporters are going to be under more and more pressure.''
Slowing inflation gives the ECB room to cut rates. Core inflation, which excludes energy and food prices, slowed to 1.9 percent in January. The main inflation rate, which the ECB aims to keep below 2 percent, rose to 2.3 percent in February from 2.2 percent the month before.
Inflation ``expectations are below 2 percent and this is a favorable situation for further developments,'' ECB council member Ernst Welteke said in an interview on Saturday.
Not All Convinced
Some ECB officials may need convincing. Bank of France Governor Jean-Claude Trichet last week forecast a ``significant'' recovery in the second half of the year, straying from Duisenberg's statement three days previously.
Bank of Italy Governor Antonio Fazio, who said he often sides with Duisenberg, added the time may not be right for a rate cut given ``current uncertainties'' surrounding the threat of war in Iraq. Austria's Klaus Liebscher said in an interview two weeks ago a reduction isn't necessary to revive growth.
Europe's economy may stave off a recession this quarter, reports in the past week have suggested. Business confidence improved in Germany, Italy and Belgium last month and European manufacturing activity in the region unexpectedly climbed for the first time in six months.
The ECB says its 18-member council makes decisions by consensus. The last time the ECB signaled a split among policy makers was on Nov. 7 when Duisenberg said the council ``discussed extensively the arguments for and against a cut.''