In a statement, ECB president Wim Duisenberg said that the bank did not want to appear "panicky" and that the recent surge in M3 money supply, although partly caused by temporary factors, needed "to be monitored carefully in the coming months." That might be a hint that the ECB will not cut again in the autumn.
The bank had followed the Federal Reserve in trimming rates on Sept. 17 after the terrorist attacks. That was the third cut this year, pulling the target repurchase rate down to 3.75% (chart). But analysts had been hoping for more aggressive action, since inflation continues to slow and economic growth is faltering.
The latest bad news on growth came from revisions to second-quarter gross domestic product. The report confirmed that euro zone GDP rose 0.1%, but real consumer spending grew only 0.4%, instead of a previously reported 0.6%. Also, the data are not encouraging about third-quarter growth. Private economists expect the euro zone to grow about 1% in the second half.
But the ECB remains more worried about inflation than growth, despite better news on the price front. In August, euro zone inflation stood at 2.7%. While still above the ECB's 2% target, it was the third consecutive month of improvement. And the recent decline in energy costs as well as slowing demand suggest inflation will slip lower in coming months. Already, France has reported that September consumer prices rose only 1.6% from the year before.
Despite that, the bank for now is holding its ground about rate cuts. Policymakers hope that structural changes in public finance, labor markets, and distribution have set the stage for stronger growth in 2002. But with the U.S. in recession and the military future so unclear, the ECB is taking a risk by not giving the euro zone some insurance against a recession of its own. By James C. Cooper & Kathleen Madigan