European rate cut called timid

The European Central Bank (ECB) today cut interest rates by 0.25% to 2.5 % amid growing signs of economic distress in the eurozone, but the move left economists criticising the ECB's timidity.

"It really smacks of a compromise, not daring to go for a 50 (basis points) cut," Adolf Rosenstock of Nomura International told Reuters, "but equally not to do anything right now obviously didn't seem appropriate ... I think the markets won't be really happy with the move because it shows a lack of courage and it shows the ECB council in an indecisive mood."

German unemployment figures today provided the latest evidence of economic malaise as the jobless rate in Europe's largest economy rose to 11.3% in February, its highest level in five years. The total number of Germans out of work jumped by 60,000 to 4.7 million in a devastating blow for Gerhard Schroeder, who came into office in 1998 promising to cut the unemployment rate.

In other signs of weakness, economic growth in the eurozone rose just 0.2% in the fourth quarter of last year - weaker than the US, UK and Japan. This contrasted with the 0.4% increase in the third quarter. To make matters worse, the early signs for the first quarter show no improvement.

Amid all the evidence of economic weakness, Wim Duisenberg, the ECB president, signalled 12 days ago that the Bank would relax monetary policy to help Europe's struggling economies. He said at the time that the 12-member eurozone is unlikely to hit its 2%-2.5% growth target this year. He also said that weak demand will dampen inflationary pressures.

Given the hint of a cut in rates, speculation centred on how much they would come down. The quarter-point cut indicated that inflation hardliners, including Otmar Issing, the ECB's chief economist, had blocked a bolder move.

An ECB report last week said that there was already plenty of cheap money available to worthy borrowers and Mr Issing is worried about rising budget deficits. With government spending rising in France, Germany and Italy, a rate cut could pump too much cash into the eurozone and feed financial indiscipline, the report warned.

But the ECB's preoccupation with inflation at a time of sluggish growth has given rise to widespread criticism, with Mr Duisenberg coming under fire from the International Monetary Fund for failing to prepare markets adequately for interest rate decisions. Those criticisms abounded today as the markets had expected a half-point cut.