Investors to the European Central Bank: It's about time.
The ECB finally cut short-term interest rates by a quarter point on Aug. 30. Although the move was expected, ECB watchers were getting impatient because the cut lagged behind weeks of data showing that the euro zone economies were slowing sharply. Some lowlights: Germany's economy did not grow in the second quarter. Consumer confidence in the Netherlands fell to a five-year low in August. And the number of unemployed in France jumped by 57,000 in July, the biggest advance in five years.
Despite the dim euro zone outlook, the ECB was reticent about cutting rates because the bank's legal mandate is to fight inflation. Indeed, policymakers seemed to go out of their way to remind investors that the bank's purpose is not to promote economic growth. Bundesbank President Ernst Welteke said: "The ability to fine-tune growth is clearly overestimated." And ECB member Klaus Liebscher told Reuters newswire that policy "is not a panacea to boost growth."
Policymakers' reluctance can be traced to the recent runup in consumer prices. Yearly inflation for the entire euro zone stood at 2.8% in July. But while that's above the ECB's 2001 target rate of 2%, the pace is an improvement from May's peak of 3.4% (chart). Moreover, the inflation outlook is quite sanguine. A large chunk of the acceleration was caused by higher energy prices, which have since receded. And the euro has strengthened, so prices for imports should come down. Since July, the euro is up 5% against the U.S. dollar.
Whereas the euro zone grew by a strong 3.4% in 2000, expectations are that growth has slowed to between 2% and 2.5% this year. But the ECB's statement suggested policymakers are in no rush to reduce rates again anytime soon. Analysts expect one more trim before the end of this year. That would make it only the third cut this year--far behind the seven rate reductions by the Federal Reserve and the four by the Bank of England.
By James C. Cooper & Kathleen Madigan
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