|
||||||||
  |
||||||||
|
||||||||
|
||||||||
|
||||||||
|
||||||||
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Debunking Europe's central bankers
By CNN's Gordon Isfeld
FRANKFURT, Germany -- Groans of disappointment could be clearly heard on trading floors and in board rooms across Europe this week when central bankers failed to prescribe what many thought was the best medicine for the region's ailing economy -- lower interest rates. After all, the U.S. Federal Reserve -- the keepers of the world's biggest economy -- had finally ended a year-long draught and eased the taps on borrowing, cutting its key rate by a bigger-than-expected half a percentage point. But instead of following the Fed's lead, the European Central Bank did what it has done since November 2001 -- nothing. "The case for a cut was compelling. It's been obvious for months and only the ECB can't see the risks," Fabio Scacciavillani, an economist at Goldman Sach, told Reuters.
Added Richard Champion, a European fund manager at Pavilion Asset Management: "The lack of follow-through by the ECB after the Fed rate cut was a real blow. It seems we must continue to lean on the U.S. consumer, who may well be flagging." So, what is stopping the ECB and its dogmatic president, Wim Duisenberg, from cutting us a little slack? The simple answer: Inflation and deficits. When the Fed cut its rate on Wednesday -- lowering borrowing costs to 1.25 percent, a new 40-year low -- it was seen as a logical move at a time when the engine of global growth was showing signs of stalling. And having just re-emerged from recession at the end of 2001, there were fears the U.S. economy might be heading toward deflation -- when a seemingly unstoppable decline in prices cuts into corporate profits, cripples growth and sends unemployment spiralling higher. Inflation is ECB's main concernFor the 12-nation eurozone, the main concern is not deflation, but inflation -- the barometer used by the ECB to test the health of the economy and set monetary policy. So far, the ECB would argue, member countries have failed to keep inflation below the central bank's 2 percent comfort zone and many have made matters worse by not adhering to the European Union's Stability and Growth Pact, which requires governments to limit their budget deficits to 3 percent of gross domestic product. The ECB fears that overspending and large government deficits will erode confidence in the euro, pushing its value lower and making it more expensive to buy imported goods -- further flaming inflation. The biggest offenders have been countries with the biggest economies -- Germany, France and Italy. For month, central bankers have been embroiled in a debate with these countries over the deficit issue -- overlooking, says some analysts, the more important issue of interest rates. The ECB lowered its lending cost four times in 2001 to 3.25 percent. The BoE cut its key rate seven times last year to a 38-year low of 4 percent. Both rates have remained unchanged since last November. While there are fewer concerns about the UK economy -- which is still performing better than that of other Group of Seven nations -- rates will likely come down soon due to worries about a sluggish manufacturing sector and weak exports. These problems also exist in the eurozone, where economic growth has slowed to a crawl, unemployment has soared and recession has become a real threat -- especially in Germany, which only escaped its clutches late last year. But instead of tackling these concerns with the best tool available -- interest rates -- the ECB has been focusing on the threat of inflation and fuming about members' resistance to budget-deficit rules. "It looks as if economic parochialism prevailed in the ECB's decision," says Bear Stearns, an investment bank that has been vocal in its criticism of Duisenberg and the rest of the 18-member policy committee. "We think that the ECB are operating behind the curve again on rates." But central bankers may be edging closer to a dramatic sift in monetary policy. Duisenberg, who is known for his veiled comments -- usually containing a line about rates being at "appropriate" levels -- dropped a few more hints of what was to come during a news conference following the ECB's monthly rate meeting on Thursday. He told reporters that the ECB would "monitor closely" the risks of declining economic growth. "To 'monitor closely' is the nearest that you are going to get to the ECB-speak, telling the markets that they are on the brink of effecting an interest rate policy change very soon," says Bear Stearns. The investment bank believes the ECB "should be ready to deliver the goods" in December with a quarter-percentage point rate cut. "The way that the eurozone fundamentals are operating at the moment, we think that the ECB needs to get the... rate down from 3.25 percent at the moment to 2.50 percent in the next three to four months to make any near term difference to the recovery stakes."
|
|
|||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||
