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ECB surprises with rate cut
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May 10, 2001: 8:43 a.m. ET
Euro zone central bank shocks markets with rate cut to counter slowdown
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LONDON (CNN) - The European Central Bank shocked the markets with a quarter-point interest rate cut on Thursday to counter a slowing in euro zone growth.
The ECB lowered the interest rate to 4.5 percent, its first move in two years, from 4.75 percent. Only three economists out of 50 polled by Reuters expected a rate cut.
The surprise move came after a raft of bad economic data from euro zone economies and was contrary to the rate policy committee's public statements, saying its mandate was to keep inflation under control.
Germany, the euro zone's largest economy, posted higher unemployment as well as lower retail sales, factory orders and manufacturing output in recent days, leading to calls for the ECB to follow the lead of the U.S. and most other leading economies.
"That's got to be the biggest monetary shock of the new millennium," said David Brown, chief economist with Bear Stearns. "They've completely pulled the wool over the market's eyes. The first casualty has got to be their credibility. They've led the market into a blind alley."
The rate cut – the second since the ECB was established in 1998 --provided a fillip for the markets, with the euro strengthening half a cent against the U.S. dollar to 89.20 U.S. cents.
Technology and interest rate-sensitive banking stocks pushed key markets in France and Germany to new highs for the day.
"Recent data suggests the German economy is going down the tubes and there are some German central bankers talking recession risks," economists at Bear Stearns wrote in a note to investors before the rate cut. "This highlights that, at some stage, the rot has to stop."
Ulrich Beckman, economist at Deutsche Bank, told CNN that he expects the ECB to cut rates again in early July, if June inflation figures are favourable. But, Backman reckons that would be "too little, to late" for growth in the euro zone.
Inflation for the euro zone in March was an annualized 2.6 percent, which is above the ECB's 2 percent target rate.
The rate cut came 45 minutes after the Bank of England also eased rates by 0.25 of a percentage point to 5.25 percent. The rate is at its lowest level since November 1999 but remains the highest in the Group of Seven leading industrial countries.
The move came as annual UK economic growth slowed to 2.5 percent in the first quarter compared with 2.6 percent in the fourth quarter of 2000.
The bank is attempting to stave off the effects of the U.S. slowdown and other negative factors such as the economic damage caused by foot-and-mouth disease afflicting UK agriculture, which has reduced tourism revenue.
"The world's economic prospect has on balance continued to weaken. The extent and duration of the slowdown remain uncertain," the Bank of England said, adding that a rate cut was necessary to meet its 2.5 percent inflation target "in the medium term."
Underlying inflation is currently at just 1.9 percent and has been below target for two years.
--from staff and wire reports 
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