European Central Bank faces pressure to cut interest rates

Tim Wallace
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WORSENING economic data has shifted the European Central Bank’s (ECB) focus towards new interest rate cuts.

The headline rate currently stands at 1.5 per cent following increases in April and July. Since then inflation expectations have slightly fallen and growth has ground to a halt.

The German economy grew by just 0.1 per cent in the second quarter, and France recorded no growth at all. Meanwhile inflation expectations for 2011 and 2012 have fallen to 2.7 per cent and 1.8 per cent respectively, according to Barclays Capital.

The ECB’s language, too, hints that rising inflation is no longer a worry. Economists have noted that bank president Jean-Claude Trichet has announced he will not use the words “strongly vigilant” in his statement on this Thursday’s rate decision. That contrasts with earlier statements highlighting “upside” inflationary risks.

This shift in opinion creates room to pull back from the recent programme of monetary tightening.

Few are predicting a quick rate cut, though – “the ECB is likely to pause on rates until the back-end of next year,” says Investec’s Philip Shaw. “However, we would not rule out the ECB beginning to ease again if warranted by weak data flow over the next couple of months.”