FRANKFURT, June 5 - The European Central Bank cut interest rates half a percentage point to record lows on Thursday to help a floundering euro zone economy and said there is room for further cuts if needed. With inflationary pressures retreating markedly and growth prospects sluggish for this year, ECB President Wim Duisenberg said the economy faces downside risks. "If the United States has even lower rates than we have, you can imagine we have not exhausted our room for manoeuvre," Duisenberg said. The ECB's action, its third cut in six months, puts rates for the world's second largest economic region at 2.00 percent, their most stimulative ever. But they remain 0.75 percentage points above those set by the Federal Reserve, which has signalled a further reduction may be coming though U.S. growth is stronger.
Short-dated government debt yields hit record lows as markets began pricing an 80 percent chance for another quarter percentage point ECB rate cut by September. The euro rallied and stocks were mixed. "He didn't say 'that's it' and try to draw the line," said Keith Wade, chief economist at British Fund Manager Schroders. "If the economic numbers don't start coming through in the next two to three months, we could get another cut." The leaders of the French, German and Italian governments, whose weak economies are crimping government budgets, welcomed the action. "I am very happy. It will help support growth and employment," said German Chancellor Gerhard Schroeder. Deutsche Bank Chief Executive Josef Ackermann called the size appropriate. "Fifty basis points in my view is a good step," he said.
EASING CYCLE
Sweden and New Zealand also cut official rates on Thursday, while the Bank of England and Swiss National Bank held steady. Duisenberg said the rising euro and weak growth gave the central bank's policy-making committee room to lower rates. "We have concluded that the outlook for price stability over the medium term has improved significantly since our last decison to lower interest rates," Duisenberg said. He said inflation would fall notably below the two percent mark defined as price stability by the ECB. Revised euro zone growth figures are expected next week, but Duisenberg said growth will be sluggish this year and pick up only moderately next year, suggesting the data will be poor.
Still, Duisenberg was firm in saying that the central bank's action was not driven by concerns the 12-nation economic area would slip into a damaging deflationary spiral where falling prices destroy growth. "We are convinced that we don't have to prepare ourselves for deflation because we don't see deflation coming. That is what I have said loud and clear," Duisenberg said. Fresh evidence of economic malaise came on Thursday with the European Commission forecasting stagnation at worst and 0.4 percent growth at best in the second and third quarters for the 12-nation euro zone -- uncomfortably near to recession. May euro zone data has shown a lifeless economy. Manufacturing slumped to its lowest level since January 2002 and the service sector contracted last month. In Germany, the research institute IfW on Thursday cut its growth forecast to zero for 2003, putting the region's largest economy firmly in recession. Yet there are some mixed signals. Economic sentiment in May stabilised while Germany surprised with the jobless level retreating by 4,000 in May. Its industrial orders posted a robust 1.4 percent monthly rise in April, and the retail sector is showing signs the worst may be over. This would fit with Duisenberg's projection that economic recovery should start to take hold later this year, with growth gathering steam in 2004. The ECB will release its official revisions to forecasts next week.//