Bankers weigh rate cuts

Alan Greenspan is set to throw down the gauntlet this Wednesday to central bankers in London and Frankfurt by cutting the key Federal Funds interest rate. Sir Edward George at the Bank of England and Wim Duisenberg at the European Central Bank will face acute dilemmas over their own interest rate decisions, to be announced the next day.

Both European banks are constrained by external factors. A Bank of England cut risks exacerbating imbalances and causing a new surge in house prices. Duisenberg's plans to cut rates are complicated by European government attempts to water down eurozone deficit rules.

Greenspan is expected to cut the Federal Funds rate from 1.75 per cent to 1.5 per cent on Wednesday after US consumer confidence slumped to its lowest level in nine years. But there have been signs of a split on the decision-making Federal Open Market Committee. Two Fed officials voted for a rate cut in September, the first dissenters in four years.

The BoE's last meeting was a split decision too, with three Monetary Policy Committee members voting for lower rates. Pressure following a Fed cut, and the change of views likely with the publication of the November Inflation Report, could tip the balance in favour of a small cut in base rates to a 47-year low of 3.75 per cent. City economists marginally favour leaving rates at 4 per cent.

Markets would be most cheered by a coordinated Fed-ECB cut. But the furore over attempts to replace the Stability Pact could tie Duisenberg's hands.