BRUSSELS, June 12 - European Central Bank President Wim Duisenberg tried for a second day on Thursday to temper market expectations for interest rate cuts, saying talk of monetary easing is premature although there was still room for lower rates. Duisenberg painted an uncertain picture of conditions in the $8 trillion euro zone economy, where inflation is receding significantly but growth is weak, in testimony to the European Parliament's economic and monetary affairs committee. This cautious outlook, coupled with sharp downward revisions by ECB staff to growth and inflation projections, convinced financial markets the ECB's two-year monetary easing cycle is not yet over, only the timing is at stake.
"The ECB has left the door open for another rate change, seeing as inflation in the region looks under control," said Andrea Williams, head of European equities at Royal London Asset Management. Other ECB policymakers reinforced Duisenberg's message that more time is needed. Bundesbank President Ernst Welteke called it "absolute nonsense" to think the ECB chief is laying the groundwork for more rate cuts, while Dutch central bank head Nout Wellink told monetary conditions are appropriate. In European trade, stocks built on their five-month rally lifted by rate cut hopes, but government bond yields backed up after an initial fall to end the day little changed.
Duisenberg repeated his comment made late Tuesday -- namely that: "I think it is too early to now start discussing and speculating about future interest rates moves." But at the same time he also indicated the ECB has leeway if needed. "Well, if the U.S. has room for manoeuvre with an even lower interest rate level than we have, then you can imagine we have not exhausted our room for manouevre," Duisenberg said. The latter statement Duisenberg first made on June 5 after the ECB cut rates by half a percentage point to a record low of 2.00 percent. U.S. rates are three quarters of a point lower.
SLOW THE HORSES
While initially sounding contradictory, twinned together, economists said the central bank chief wants to ratchet back expectations for a half percentage point rate cut soon. "He's curbing the likelihood of a rate cut in the next two months," said Chris Gothard, currency analyst at Brown Brothers Harriman in London. It may be working. A poll released on Thursday showed the median forecast of 40 bond dealers was for a quarter point ECB rates cut by year's end. In contrast, a week earlier, 33 of 45 economists expected a half point rate cut by September. Clearly though, Duisenberg does not see plain sailing ahead for the euro zone economy, which stagnated early this year. "Economic growth in the first half of 2003 is likely to have been weak, very weak, and expectations for annual average growth of this year and 2004 have had to be scaled down," Duisenberg told the European Monetary Affairs Committee.
Corporate restructuring is taking its toll, global growth is sluggish and the SARS virus poses an impediment to the outlook. "Downside risks to economic growth remain," Duisenberg told the committee. At a news conference in Vienna, ECB Vice President Lucas Papademos added that the central bank will monitor developments closely to see if recovery takes hold, while ECB Governing Council Member Gertrude Tumpel-Gugerell said in a newspaper interview economic data are very mixed. ECB staff in new forecasts officially released on Thursday cut growth by roughly three quarters of a percentage point to a 0.4-1.0 percent range for 2003 and to 1.1-2.1 percent in 2004.
Inflation pressures also are falling with consumer prices looking set to rise by only 0.7-1.9 percent next year -- for a midpoint well below the ECB's goal of close to 2 percent. Analysts say this points to a need for further rate cuts.//