European bank under pressure to cut rates

The European Central Bank today came under renewed pressure to cut interest rates as German business confidence fell to a nine month low in October.

According to a key survey from the Ifo economic institute in Munich, German business sentiment fell to its lowest level since January and for the fifth month in a row in October as pessimism about the future outweighed an improvement in current business conditions.

The Ifo institute's index of German business confidence fell to 87.7 from 88.2 in September, lower than an expected reading of 88. The Ifo president, Hans-Werner Sinn, said in a statement that the drop was entirely due to pessimism in the manufacturing sector.

The survey of 7,000 companies indicated that growth in Europe's largest economy will not pick up soon, and provided more ammunition for those arguing for lower rates for Europe.

The European Central Bank (ECB) is under pressure from politicians and executives to cut interest rates and boost growth.

The bank kept its key lending rate at a two and a half year low of 3.25% at its last meeting on October 10. Its next meeting is on November 7. Policy makers lowered borrowing costs four times last year, but have been criticised for failing to do more.

"It's totally clear that now is the right time to cut interest rates," the Austrian chancellor, Wolfgang Schussel, said last week. "It's unthinkable that that move won't occur."

The European commission pared its growth forecast for the region five times this year and now predicts the slowest rate of expansion in a decade. The 12 countries using the euro grew 0.4% in the second quarter, the same as in the first.

The Ifo index has a long track record of predicting growth trends in Germany and is also seen as one of the key indicators of the performance of the whole eurozone. Ifo economists said government plans to raise taxes and cut spending may have dented confidence.

"This may have played a role [in the confidence drop]", said Gernot Nerb, an economist at Ifo. Half the responses to the survey were received after the government announced plans to plug gaping holes in the budget.

The chancellor, Gerhard Schröder, won last month's election by the narrowest margin of any postwar government in Germany.

"The further fall [in business confidence] will increase pressure on the ECB to act," said HSBC bank, adding however that a surge in money supply growth in the eurozone in September had complicated the situation.

The ECB said annual money supply growth rose to 7.4% from 7% in August, compared with the consensus forecast of 6.7%.