ECB chief signals rate cut as Berlin realigns

The head of the European Central Bank, Wim Duisenberg, yesterday hinted that the ECB could be prepared to cut interest rates tomorrow to help struggling economies within the 12-nation bloc.

The suggestion came as the eurozone's leading central banker also cast doubts on Germany's ability to curb its budget deficit to meet eurozone rules and head off the threat of a confrontation with the European commission.

Germany is already certain to breach stability and growth pact rules limiting budget deficits to 3% or less of gross domestic product and battling to avoid a second breach in 2003.

The Berlin government has already seen its political popularity hit by measures to bring the budget back on target, with finance minister Hans Eichel warning further belt-tightening would be needed through cuts in public spending."In 2003, we will make all efforts to get below 3%," Mr Eichel said.

But while Mr Duisenberg acknowledged the effort, he was sceptical about the probable outcome. He told members of the European parliament's economic and monetary affairs committee: "As to the measures they have taken or are contemplating for next year, it remains to be seen whether they will come under 3%. We are somewhat concerned that it might be very difficult for them."

If Germany were to miss the 3% limit next year it would put it on a collision course with the EC, which polices the pact and which could seek to impose fines on Germany, raising the threat of a serious row between Berlin and Brussels.

As Mr Eichel noted, domestic stresses are evident after moves to cut the deficit. "We cut €2.9bn in unemployment support, and that wasn't easy, to cut funds for people with not very much money to begin with." The government has also come under fire for trying to boost tax revenues and increase pension contributions.

Financial markets are expecting the ECB to cut rates by at least 0.25%, which would be the first cut since last November as rates have been kept on hold to dampen inflation - the bank's key target - which has been persistently higher than expected.