Eurozone cuts rates as Britain waits and sees

The European Central Bank sought to revive confidence in Europe's slow-moving economy yesterday when it responded to the jitters caused by the looming threat of war and cut interest rates to 2.5%.

As the Bank of England opted to leave rates on hold at 3.75%, the ECB responded to pressure from financial markets and politicians and cut rates by 25 basis points.

There was some disappointment in the markets that the ECB had not opted for a more aggressive 50-point cut, which would have taken rates to the lowest level in the bank's four-year history.

"Sometimes, we despair of the ECB," said Martin Essex, of Capital Economics, on a day when figures showed eurozone growth was just 0.2% in the final quarter of 2002, and unemployment in Germany rose to 11.3%. Mr Essex said the size of the cut was "deeply disappointing".

Blaming uncertainty created by the military stand-off in Iraq, the ECB's president, Wim Duisenberg, said eurozone growth this year was likely to be at the bottom of the bank's 1.1%-2.1% forecast range.

"In light of recent developments, the outlook for economic growth in the euro area in 2003 has weakened compared with previous expectations owing especially to geopolitical tensions and the associated rise in oil prices."

Mr Duisenberg admitted the ECB could be forced to cut rates again in the coming months if recovery fails to materialise. "Depending on further developments, the governing council stands ready to act decisively and in a timely manner."

The Bank of England's monetary policy committee left rates at their 48-year low, following last month's unexpected quarter-point reduction.

Despite evidence in recent few weeks that the economy remains vulnerable to global weakness, employers' organisations said they understood the Bank's wait and see approach.

"It is sensible for the Bank to keep its powder dry after last month's surprise cut," said Ian McCafferty, the CBI's chief economic adviser. But more rate cuts might be needed. "The MPC needs to watch closely for signals showing the economy taking a further turn for the worse in the coming months."

In the financial markets, the euro continued its upward trend against the dollar after the cut, but shares in Paris and Frankfurt were down on fears that the reduction would be insufficient to boost growth.

"The economic effect of this cut is virtually zero," said Volker Nitsch, economist at Bankgesellschaft in Berlin.

There was speculation that the cut was either a compromise between hawks and doves on the ECB's ruling council or a slap on the wrist for Germany and France for breaching the stability and growth pact.