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ECB cuts interest rates
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April 8, 1999: 12:30 p.m. ET
Central bank trims rates 0.5% as gloom envelops European economy
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LONDON (CNNfn) - The European Central Bank cut interest rates for the first time Thursday, trimming the discount rate in the 11 euro-zone countries by half a percentage point to 2.5 percent, more than analysts had predicted.
A stream of weak industrial data throughout the region and ECB statements in support of the weakening euro meant a reduction was widely discounted in the market, although most commentators expected a 25 basis point decline.
"There would have been disappointment if the Bank didn't act today," said Julian Callow, chief European economist at Dresdner Kleinwort Benson. "Inflation is low and under control and the ECB is quite concerned about the economic outlook."
Data on German industrial orders released Thursday confirmed the country's economic slide, with volumes down 4.2 percent versus a year ago.
The first rate change in the ECB's four-month history could help dampen criticism from the U.S. and Japan of Europe's failure to play its part in stimulating global growth.
"Europe has had an image problem. It has seemed unable to change and adapt to the world," said Claudio Piron, treasury economist at Standard Chartered Bank.
The ECB had resisted strident political calls from Germany and France to cut rates over the past two months, notably from former German finance minister Oskar Lafontaine.
However, economists believe the ECB remains divided over the cause and cure for Europe's economic malaise. The main concern among the 15 central bank governors and eight ECB executives is the widely varying growth rates in the euro-zone. "There could be quite a lively debate," said Callow.
Piron noted that ECB board members have made few public statements in recent weeks except to say that the fall in the euro was not a cause for concern.
However, he noted that the latest cut would have a minimal impact at a time when growth forecasts for the euro-zone are being revised down. "in the longer term it will do nothing," he said. "Monetary policy is an ineffective instrument at a time when currency and capital flows are chasing growth."
The ECB's decision is expected to set off a chain of cuts in Europe. The Bank of England cut U.K. rates by a quarter-point to 5.25 percent earlier Thursday.
Sweden's Riksbank cut rates to 2.8 percent last week and Norway and Denmark, both outside the euro-zone, are expected to follow suit.
Only the Swiss central bank is expected to hold steady when it meets next week.
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