Duisenberg clears path for cut in eurozone rates

The head of the European Central Bank yesterday cleared the way for a cut in interest rates tomorrow, saying that inflation and growth were both weak.

Wim Duisenberg, the ECB's president, told MEPs there were several downside risks to the bank's forecasts of a mild recovery next year for the 12-nation zone. He said there had been an "extensive debate" at the ECB's November meeting over whether it should cut rates to tackle the weak economic outlook.

"Since our last meeting, the evidence has strengthened that inflationary pressures are easing somewhat and downside risks to economic growth have not vanished," he said.

The bank has been under intense pressure from national governments and business lobby groups to cut its key lending rates to avert the threat of a major recession.

Until recently the Bank had ignored the pleas, instead focusing on the threats to inflation from members states' inability to keep control of their public deficits.

There was fresh advice for member states yesterday but this was overshadowed by Mr Duisenberg's warnings for the outlook for the European economy. He said the bank still thought the eurozone could return to its potential growth rate of more than 2 per cent next year but that global economic imbalances and the threat of war in the Middle East were clouding the picture.

"There are several downside risks to this," Mr Duisenberg said. "They relate to the persistence of macroeconomic imbalances in the global economy, geopolitical tensions and the uncertainty about the size of the adverse effects of the past sharp declines in stock prices on aggregate demand," he said.

A Reuters poll ahead of his speech showed that most economists expect the ECB to cut interest rates by 50 basis points, which would bring its main rate to 2.75 per cent.

"His comments effectively suggest that there will be a rate cut," said Audrey Childe-Freeman, European economist at CIBC World Markets in London. "It is no longer a question of whether but of how much rates will be cut."

Robert Mundell, the Nobel Prize-winning economist, added his voice to those calling for a substantial rate cut, telling two Italian newspapers that the ECB had to act decisively. "I would say [they need to cut] by 0.5 per cent. It's a change that would give a definite signal and at the same time leave further margin for future manoeuvre," he said.

A cut by the ECB would leave the Bank of England isolated for the second month in a row. Its Monetary Policy Committee will set rates at noon tomorrow, less than an hour before the ECB's decision, when it is expected to leave rates on hold. Last month it kept its base rate on hold at 4 per cent for the 12th month in a row, just hours after the US Federal Reserve surprised the markets with a half-point cut.