Currencies

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European Central Bank May Move Toward Interest-Rate Cut as Confidence Ebbs
March 29 (Bloomberg) -- European Central Bank President Jean- Claude Trichet may this week signal a willingness to reduce interest rates amid government and industry reports that may show stagnating consumer and business confidence, according to economists including Conrad Mattern.

``Sooner or later, they will have to cut if the indicators continue like this,'' said Mattern, chief economist at Activest Investment in Munich, which manages about $50 billion. ``They will discuss a rate cut and we expect a reduction, but not this week.'' He forecasts a reduction in May or June.

Rate-cut speculation has increased, pushing the euro to its lowest against the dollar this year, since Trichet said last week the ECB may have to lower its forecast of 1.6 percent economic growth in 2004 unless consumer spending picks up. German business confidence fell for a second month in March, hurt by a drop in retailing, an industry report Friday showed.

A reduction in the ECB's benchmark rate, currently 2 percent, is unlikely at this Thursday's meeting, according to economists surveyed by Bloomberg News. Of 36 economists polled Thursday and Friday, all but two forecast no change. Eight said they expect a cut by June.

Revised Forecasts

Since the survey, Deutsche Bank AG, Bank of America Corp. in London and Barclays Capital changed their forecasts for ECB rates. Deutsche Bank now expects a quarter-point reduction by June. Europe's second-largest bank by assets, based in Frankfurt, had previously predicted a 2 percent rate through 2004. London- based Barclays forecast a quarter-point cut as soon as this week.

The euro fell to $1.2045 today, the lowest in almost four months and taking the currency's decline from a Feb. 18 record of $1.2930 to almost 7 percent. Europe's single currency bought $1.2095 at 9:37 a.m. in Frankfurt.

ECB board member Gertrude Tumpel-Gugerell said on Friday that Europe's recovery may be delayed and the bank is ready to pare interest rates if needed.

``We expect a clear signal at the press conference that the ECB is ready to cut rates in May should the German data reflect conditions for the euro region,'' said Karsten Junius, an economist at Dekabank in Frankfurt and co-author of a book on the central bank. ``We will get a warning before they cut rates.''

Slower Pace

The European Union's statistics office will probably say on Wednesday that business and consumer confidence stagnated in March, according to a survey of 30 economists polled by Bloomberg News. An industry report on Thursday may show European manufacturing expanded at a slower pace this month than in February, according to a separate survey of 28 economists.

German consumer confidence was unchanged this month as expectations for future income and economic growth deteriorated, the GfK AG market researcher as saying. GfK also said shoppers were more pessimistic than previously estimated last month.

``When you open the newspaper there's not much positive news for the consumer at the moment,'' said Rolf Buerkl, an economist at GfK. ``People don't have any certainty that allows them to plan for the future -- they don't know how their incomes will develop.''

The ECB will announce its rate decision on Thursday. The bank hasn't cut rates since June last year, when it lowered its main lending rate by half a point. In the U.K., which hasn't adopted the euro, the Bank of England has begun raising rates.

The U.K. central bank's benchmark rate stands at 4 percent after increases in November 2003 and February this year. The U.S. Federal Reserve's overnight rate stands at 1 percent.

Futures Trading

Investors increasingly expect the ECB to cut rates by the end of June, futures trading suggests. The yield on the three- month contract for June settlement was at 1.85 percent today, down from 2 percent at the start of March. The money market rate was 1.97 percent, below the ECB's benchmark refinancing rate.

``We stick to our forecast of no change on Thursday, but the risk that they will cut is at 40 percent,'' said Dekabank's Junius, one of five economists who correctly predicted the ECB's unexpectedly small quarter-point rate cut on March 6, 2003. ``There could well be a vote, and the outcome wouldn't be unanimous.''

ECB council member Yves Mersch said on Friday that rates are ``appropriate'' even though economic reports have been ``mixed'' and Bundesbank Chief Economist Hermann Remsperger said he sees no need to change his growth forecast for Germany after business confidence dropped. Ernst Welteke, the bank's President and one of 18 rate-setters on the ECB's council, said earlier last week the current level of rates doesn't hinder growth.

`Not Clear-Cut'

Some economic reports suggest Europe is still on a recovery path. French consumer spending held steady in February after rising 3.3 percent in January, the government said Tuesday. German retail sales probably rose for a second month in February, the median of 19 forecasts in a Bloomberg News survey of economists showed.

``The case for lower rates is not clear-cut,'' said Lorenzo Codogno, co-chief economist for Europe at Bank of America in London, in a note to investors. ``Euro-zone business and consumer confidence due on March 31, just one day ahead of the ECB council meeting, could take on additional importance.''

Codogno on Friday revised his ECB forecast, saying he now expects a half-point rate reduction in the next two months, after the drop in German business confidence. Previously, the bank saw only a 40 percent chance of a cut. Disappointing data ``will probably tilt the balance at the ECB toward a cut,'' he said.

Inflation below the bank's 2 percent limit and slowing money supply are giving the ECB room to pare rates. European inflation probably stayed at a rate of 1.6 percent in March, economists expect a report on Wednesday to show. Money supply, the ECB's gauge of future inflation, grew at the slowest pace in more than two years in February.

``The ECB will prepare a rate cut on Thursday,'' said Julian von Landesberger, an economist at HVB Group in Munich. ``They see that their picture of a gradual recovery is no longer intact, and they will get more reasons for a cut in April.''


To contact the reporter on this story:
Christian Baumgaertel in Frankfurt at [e-mail].

To contact the editor of this story:
Heather Harris at [e-mail].
Chris Kirkham, or [e-mail].

Last Updated: March 29, 2004 02:49 EST