SPAIN: PLAYING CATCH-UP IN THE RATE-CUTTING GAME After a meeting in Austria, some European politicians called for lower interest rates to head off a global downturn. But Spain is already trying to get its rates down to the levels of those in Germany and France. So the Bank of Spain would likely resist even lower rates that could overheat Spain's solid economy. Central banks in the new euro zone are converging their policy rates before the euro is introduced on Jan. 1, 1999. That's why the BOS cut its benchmark rate a half-percentage point, to 3.75% on Oct. 6. And the Bank of Italy chopped a full point off its rate, to 4%, on Oct. 26. Both rates remain above Germany's 3.3%. The BOS has been trimming rates since January, 1997, making Spain a growth dynamo in Europe. Real gross domestic product grew 3.9% in the second quarter from a year ago, helped by strong domestic demand. And Spain will likely expand by 3.6% in 1999--the third-fastest growth rate in the 11-nation euro zone. Although the fallout from Asia is slowing Spanish exports a bit, spending by businesses and consumers is fueling industrial activity. Industrial production increased 6.7% in the year ended in August. Output of consumer goods surged 8.9%, while capital goods were up 2.9%. Moreover, the vibrant economy is alleviating the nation's massive unemployment problem. Payroll growth is strongest in construction and tourist-related industries, but even so, labor markets are extremely loose. The jobless rate slipped to a 6-year low in July, but it was still 18.7%, the highest in the euro zone (chart). The BOS had been hesitant to cut interest rates faster because of fears that high inflation could reemerge. But the latest data argue against any such pickup. Falling commodity prices are beginning to lower costs of some retail goods. Consumer prices rose 0.1% in August, up only 1.6% from a year ago. That's below the BOS target rate of 2.1%, which is one reason why analysts now think the central bank will focus on lifting economic growth in 1999, instead of fighting inflation. By JAMES C. COOPER & KATHLEEN MADIGAN RELATED ITEMS CHART: The High Jobless Rate Is Slowly Shrinking

Updated Oct. 29, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.
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