Europe urged to cut interest rates

German unemployment is still nearly 4 million

An influential report from Germany's six leading economic institutes has urged the European Central Bank to cut interest rates by 0.5%.

The think-tanks say that Germany's economic growth will be much lower this year than they previously estimated as a result of the global slowdown.

To avoid giving any false signals for price stability, there is only room for a slight loosening in monetary policy

German Economic Institutes

And they argue that eurozone inflation will decline from 2.3% this year to 1.8% next year, below the unofficial target level of 2%.

The ECB is already under pressure to cut interest rates at its next meeting on Wednesday. European interest rates have been left unchanged at 4.75% since October, while other major central banks have subsequently cut rates.

Germany the key

The German economy, the largest among the 12 countries who make up the eurozone and use the single currency, had been expected to grow strongly this year.

The six institutes had originally forecast that it would grow by 2.7%, pushing down Germany's high unemployment rate.

Now they say Germany will only grow by 2.1% this year, and only a slightly greater 2.2% next year, as export volumes weaken around the world.

The lower growth forecast reduces estimated growth in the eurozone as a whole from 2.8% to 2.6% - a sign that some countries on the periphery, like Spain and Ireland, are still growing strongly.

Germany has usually been more worried by inflation than other European countries, and the institutes urged a cautious approach towards rate cuts.

"To avoid giving any false signals for price stability, there is only room for a slight loosening in monetary policy at the moment. The institutes believe an interest rate cut of 0.5% is justified," they said.

OECD cuts forecast

Meanwhile, the Paris-based Organisation for Economic Cooperation and Development, made up of 29 leading industrial countries, has also forecast that growth in the eurozone this year will slow from a projected 3.1% to 2.7%.

"OECD projections are that activity would slow down more markedly this year than projected in November but that growth would not fall below potential," the report said.

And the OECB has already factored in a 0.25% cut in interest rates, and says that Europe may have to cut further if international economic conditions worsen.

"We have already incorporated a cut that we expect to come soon...as soon as possible," OECD senior economist Vincent Koen said.

In the past, the European Central Bank has been reluctant to cut rates because of fears by some of its smaller member countries that such a move would spur inflation.