Brussels, March 7 (Bloomberg) -- The European Central Bank is coming under pressure from some finance ministers to lower interest rates again after delivering Thursday's smaller-than- expected cut. The bank's quarter-point reduction in its main rate to 2.5 percent was ``a positive step,'' Greece's Nikos Christodoulakis said late yesterday after chairing a meeting of European finance ministers. ``A positive step is a step, it's not a jump.'' Fourteen of 25 economists surveyed by Bloomberg News had expected a cut of half a point to revive the economy, which the European Commission said may contract in the first quarter for only the second time in a decade. 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.
Thursday's reduction brought borrowing costs to the lowest in almost 3 1/2 years amid rising unemployment, faltering consumer confidence and waning export demand. Yesterday ``was another field day for those critics of the ECB who like to blame the bank for acting too timidly,'' Morgan Stanley economists Joachim Fels and Elga Bartsch said in a report.
`Still Leeway'
The 12-nation economy may shrink as much as 0.1 percent in the first quarter and grow as little as 0.2 percent in the second, the EU's executive branch said. Unemployment in Germany climbed to 10.5 percent, the highest in almost five years. The ECB has trimmed rates 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 Bank of England cut borrowing costs eight times in the same period. ``It's obvious to us that there is still leeway in the pipeline,'' Austrian Finance Minister Karl-Heinz Grasser said after the EU meeting.
Germany, the region's largest economy, didn't expand last quarter while France expanded 0.2 percent. A long war in Iraq may drive German growth below the 1 percent now expected by the government, Finance Minister Hans Eichel said in an interview yesterday. With the slowdown reducing tax revenue and driving up welfare spending, governments have little room for tax cuts under the ``stability pact'' that limits borrowing in order to instil confidence in the euro. ``In the coming weeks and months, there will be more room for maneuver on the monetary side than on the budgetary side,'' Belgian Finance Minister Didier Reynders told journalists at the EU meeting. The exception is France, which yesterday said its deficit will surpass the EU's 3 percent limit for the second year in 2003. That won't prevent the government from cutting taxes, Finance Minister Francis Mer said. //www.quote.bloomberg.com