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Europe sets rates after U.S. cut
LONDON, England (CNN) -- The European Central Bank and the Bank of England are due to announce their interest rates, following a half-point cut in the lending rate by the U.S. Federal Reserve on Wednesday. America's central bank cut its target for the federal funds rate, an overnight lending rate, to 1.25 percent, a new 40-year low. It was the first rate reduction of the year, following 11 cuts in 2001. But in a global economy dictated mainly by the United States, it is not certain that Europe will follow suit on Thursday, despite pressure from business leaders.
The BoE cut its key rate seven times in 2001 to a 38-year low of 4 percent and the ECB lowered it lending cost four times to 3.25 percent. Both rates have remained unchanged since last November. 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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