ECB cuts rates following revision of US forecasts

The European Central Bank finally bowed to the impact of the global slowdown on Europe's key economies by cutting interest rates for the second time this year.

Wim Duisenberg, the bank president, said it had been given the opportunity to cut rates by 0.25% to 4.25% because of the prospect of lower inflation in the 12-nation eurozone, but he acknowledged that the ECB had underestimated the length and depth of the US recession. He also admitted euroland would not be able to reach the ECB's forecast for economic growth this year of between 2% and 2.5%.

Alongside the cut in interest rates Mr Duisenberg delivered a strong warning to the 12 member governments over backsliding on their commitments to the fiscal disciplines of the zone's stability pact, which puts strict limits on government deficits.

"I should like to express concern about the impact slower growth may have on the determination of the governments of some countries to adhere strictly to the stability and growth pact," he said.

In recent weeks several governments have suggested amending the pact's rules to allow them to set spending targets to run alongside their deficit forecasts, which would allow them more room for manoeuvre in setting annual budgets. But the ECB president insisted that "short term discretionary measures aimed at strengthening domestic demand risk having an unwelcome impact on the economy."

Mr Duisenberg said there were clear signs of lower inflationary pressures. External demand was weak because of slow growth in the US and Japan's persistent economic weakness.

He acknowledged the ECB had been caught out by events in the US. "We did underestimate the length and severity of the US slow down. Together with the US authorities we tended to be over optimistic about [its] duration and depth."

Though money supply growth - a key determinant of ECB policy - is running above its target level Mr Duisenberg said the figures needed to be treated with some caution as the data was distorted by the impact of purchases of short-term debt by non-eurozone residents fleeing the fall-out in the equity market.

The cut in rates - the first since May - was widely expected by the financial markets and had little impact on the euro.


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