U.S. rate cut fuels talk on European monetary policy

With the ECB having last changed rates three months ago by delivering a 25 basis point hike in its benchmark refinancing rate to 4.75 per cent, economists are divided as to what the bank's next move will be. This in turn is adding to the uncertainty facing financial markets, with European bourses edging back down again on Thursday after a rush of enthusiasm on the back of the Fed's rate move.

Many economists believe that signs that growth in the 12-member eurozone was shifting back a gear will ultimately force the ECB's into taking its foot off the brake in Europe by joining the U.S. Fed Reserve in slicing back rates in the coming months. But with the ECB warning in a series of statements about the upside risks of inflation and still trying to build up its market credibility, other economic analysts believe that the bank is unlikely to ease monetary policy for sometime with rates on hold possibly the whole year.

"The slowdown in global growth, the recent recovery in the euro versus the US dollar and the moderation in eurozone monetary growth are all arguments why the ECB should refrain from raising rates in coming months, even though it expects core inflation to edge up further," said Jean-Francois Mercier, European economist with the U.S. investment house Schroder Salomon Smith Barney.

Indeed, after plunging by nearly 30 per cent against the dollar at one point this year, the euro's steady climb in recent weeks gives the ECB some room to manoeuvre as it weighs up its next move. The euro has risen by about 14 per cent since hitting an all-time low of 82 cents in October with the common currency hovering just below the key 95 cents mark in the wake of this week's decisions by the ECB and Federal Reserve.

In a quick succession of moves between November 1999 and October last year, the ECB hiked rates from 2.5 per cent to 4.75 per cent. And reflecting calls for the ECB to respond to the prospects of slower growth in the eurozone with lower rates, one of Germany's leading economic think tanks, the Berlin-based DIW- institute this week claimed that the bank had moved too fast in tightening monetary policy.

"The ECB would be giving a signal if it cut interest rates by half a percentage point," said the DIW's chief economist Gustav-Adolf Horn. In addition to signs that the U.S.'s marathon growth run was starting to run out of steam and evidence of a shift in global capital flows back towards the eurozone, the euro is also being underpinned by the narrowing in the gap between U.S. and European interest rates.

Despite U.S. Federal Reserve's hefty half a percentage point cut in its key funds rate to six per cent, financial markets are expecting the Fed to deliver more rate cuts as the year progresses. Further helping to boost the euro's fortunes have been expectations that growth in the U.S. and the eurozone will be roughly in line this year at about three per cent.

The ECB is also likely to draw some support for its stance of holding tight on rates from a steady stream economic data out of the eurozone and the U.S. showing the slow-down to the economy built around the euro to be less pronounced than in America.

This was underscored by the release on Thursday of data showing consumer confidence in France, the eurozone's second biggest economy hitting a record high in December.

(dpa)