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If Fed moves, will Europe follow?
LONDON, England (CNN) -- In a global economy dictated mainly by the United States, it is not surprising that next week's meeting of the Federal Reserve will have a major impact on interest rate policies in Europe. The Fed, the world's most powerful central bank, will have plenty of economic data -- most of it negative -- to sift through before deciding whether now is the time to lower borrowing costs. That decision will come just one day ahead of similar monetary policy votes by the Bank of England and European Central Bank. But despite signs of a deteriorating economic climate on both sides of the Atlantic -- and mounting pressure from business leaders and analysts to cut rates -- the outcome of these gatherings is uncertain.
"While the jury is still out on the possibility of lower rates in the U.S., there is still potential left for rate cuts in Europe, especially in the eurozone, where growth fundamentals remain on a weak footing," says investment bank Bear Stearns. Much depends on how Chairman Alan Greenspan and Fed governors react to the slew of negative U.S. economic numbers released in the past week. Many expect them to cut the key lending rate by a quarter-percentage point. The Fed lowered the rate 11 times last year to a 40-year low of 1.75 percent. Meanwhile, the BoE cut its key rate seven times in 2002 to a 38-year low of 4 percent and the ECB lower it lending cost four times to 3.25 percent. Both rates have remained unchanged since last November. And like their U.S. counterparts, central banks in the UK and continental Europe have had plenty of numbers to crunch since they met last month. In the UK, many economists have lowered their forecasts for growth to about 1.5 percent this year and 2.6 percent in 2003, slightly below government estimates and down from independent predictions just a few months ago.
Despite a generally strong performance -- compared to other major industrialised nations -- the economy is expected to weaken due to volatile financial markets and the likelihood that Britain will join the U.S. in an attack on Iraq. And while inflation remains under control, even with consumer spending running high, the manufacturing industry continues to lag behind the service sector. "Manufacturing is going to remain relatively weak and will be clearly dependent on a recovery in the world economy," Trevor Williams, an economist at Lloyds TSB, told Reuters. "The U.S. economy is looking more fragile than it was three months ago and growth prospects in the eurozone are also looking anaemic. That's going to take its toll on UK exports." Still, many economists believe the BoE will keep interest rates on hold -- at least for now -- when its Monetary Policy Committee wraps up discussions on Thursday. "The faltering global recovery means we would not be surprised to see a rate cut, but with the UK having held up well... we stick to our forecast for rates to remain on hold," Ross Walker, an economist at RBS Financial Markets, told Reuters.
Added Mark Ramsden of Stone and McCarthy: "If the bank doesn't cut in November... we expect them to move in December. "But we now think that the downside risks to global growth are high enough to prompt a cut, with the bank joining the European Central Bank and the Fed in a co-ordinated easing." In the 12-nation eurozone, the threat of economic stagnation is looming large as consumer and business confidence falls and unemployment and inflation concerns rise. Fears that inflationary pressure may stall the eurozone's economy and possibly throw it into recession -- as Germany experienced last year -- have kept the ECB on the sidelines for the past 10 months. However, observers say the bank might have little choice to cut rates soon. "The ECB still has some concerns about inflation. Wages, monetary development and oil prices suggest upside risks," Mark Wall, an economist at Deutsche Bank, told Reuters. "But we expect the downside risks from [falling] demand to grow and convince the ECB of the need to ease monetary policy -- possibly in December, but more probably in January."
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