ECB bows to rate cut lobby

The European Central Bank is bowing to demands that it should be ready to cut borrowing costs for the 12 members of the eurozone to prevent the uncertainty clouding the global outlook from dragging Europe into recession.

Admitting that Europe's economies are in worse trouble than the ECB had thought, the bank's president, Wim Duisenberg, gave a clear signal this weekend that it is preparing to offset weaker growth by cutting the eurozone's key interest rate from its present level of 2.75%.

At a Paris meeting of finance ministers from the world's seven most powerful economies, Mr Duisenberg said: "Uncertainties about future developments seem to have increased further more recently, and the perspective for an economic recovery towards potential growth already this year is no longer or not supported by the most up to date information we have".

"This weaker outlook, as we see it, should contribute to lower inflationary pressure. And as you know, price stability is our aim," he said.

Analysts seized on his comments as a sign that the ECB could move rates down at its next meeting on March 6, although some commentators suggested it might wait until the outbreak of any war on Iraq. "It sounds like a clear statement of intent to lower interest rates... It is a very different tone and the most negative to date from the ECB," said Julian Callow, the chief eurozone economist at CSFB in London.

He said a half-point cut on March 6 was clearly warranted by the dire economic climate, and the ECB was now signalling that further cuts were also in the pipeline.

"It is likely they will have to go below 2% just from the economic perspective. Add the weakness of the finance sector into the equation and we could be looking at radically lower rates," said Mr Callow.

The ECB has been heavily criticised by Britain and other major economies for being too slow in responding to the weakening world outlook.

Mr Duisenberg denied that he came under any pressure to cut rates at this weekend's meeting of central bankers and finance ministers from the G7 economies.

But Britain's chancellor, Gordon Brown, made it clear other countries were unhappy about the ECB's tardy response.

"There are clearly issues on the demand side in Europe," he said, adding that every continent had to be ready to take "decisive action".

Interest rates in Britain and the US have already been cut to more than 40-year lows, and Japanese rates have been close to zero for years.

At the Paris meeting, Mr Brown received a positive response from other rich countries to his ambitious plan to double global spending on aid by 2015. His plan would commit western countries to borrowing from private capital markets to increase development spending to $100bn a year to meet the internationally agreed goals of halving world poverty and getting every child into school by 2015. The money would be repaid from aid budgets over the next 30 years.

The finance ministers also discussed the lacklustre pace of economic reform in Europe, and in their final communiqué European ministers committed themselves to "accelerating labour, product and capital market reforms to achieve a more flexible economy".