Low growth forecasts raise chance of euro zone rate cut

The European Commission yesterday stoked speculation of an interest rate cut by the European Central Bank when it revised down its forecasts for growth and inflation in the euro currency area.

Blaming dwindling exports to Asia and Latin America, the EC predicted that the 11 countries that adopted the euro on January 1 will grow by 2.2 per cent in 1999, down from the 2.6 per cent forecast in October. The EC also said there were no inflationary pressures in the euro zone.

Deflecting talk of deflation, Yves-Thibault de Silguy, the EC's outgoing monetary affairs commissioner, said EU inflation should fall from 1.5 per cent last year to 1.3 per cent this.

'Despite the slowdown in growth being larger than expected last autumn, it will be limited and temporary,' he said.

The ECB, which meets next week, has left its benchmark interest rate unchanged at 3 per cent since taking charge of monetary policy for the euro 11.

But analysts said the EC's new forecasts, which followed downbeat remarks at the weekend about euro zone growth by ECB chief economist Otmar Issing, reinforced expectations that borrowing costs are set to fall.

The bleaker outlook in the euro zone reflects stumbling growth in Germany and Italy in particular. The German economy is forecast to grow by 1.7 per cent this year, down from 2.2 per cent previously. Expectations for Italian growth were reduced to 1.6 per cent from 2.1 per cent.

But the EC believes some smaller member states will escape from global economic turmoil largely unscathed - Finland's growth forecast was revised upwards to 3.7 per cent from 3.4 per cent while Ireland's was raised to a blistering 9.3 per cent from 8.2 per cent.

The UK's growth forecast was cut to 1.1 per cent from 1.3 per cent, keeping it at the bottom of the European Union league table but in line with the Chancellor, Gordon Brown's forecast of 1 to 1.5 per cent.

The economy of all 15 EU member sates is expected to grow by 2.1 per cent.