Pressure grows for European rate cut

ECB head Wim Duisenberg is under pressure to act

By the BBC's Europe business correspondent, Jonathan Charles

The European Central Bank is once again under pressure to lower interest rates in the eurozone.

On Wednesday, it will consider whether to cut interest rates in the 12 countries that belong to the single currency.

European interest rates have been left unchanged at 4.75% since October, while other major central banks have subsequently cut rates.

Calls for a European cut have become increasingly loud during the past few weeks, first of all from no less a body than the International Monetary Fund and latterly from Germany's finance minister, Hans Eichel.

It is unusual for a finance minister to speak out against the independent European Central Bank, but Mr Eichel's plea is a sign of just how desperately he believes a rate reduction is required.

He is understood to think that the ECB has taken far too long debating whether such a cut from the current level of 4.75% is necessary.

Dithering

The European Central Bank could be accused of dithering in the face of a growing storm.

There is no doubt that the global economic slowdown is worsening, with America and Japan now struggling.

Only Europe is left as an area of reasonable economic growth. But even in Europe there are problems.

The latest economic forecasts from Germany's six leading research institutes suggest that growth this year will be around 2.1% - a sharp fall from the previous forecast of 2.7%.

Hints

The ECB seemed to be hinting a few weeks ago that it realised a cut in rates was required to stimulate economic activity.

There were speeches from France's central bank governor suggesting that inflation was no longer an obstacle to reducing rates, even though inflation remains stubbornly above the European Central Bank's target of 2%.

But following that speech, the ECB said it had been over-interpreted, and then came more speeches pointing out that the bank remains neutral on the question of whether interest rates should be cut.

The result is much confusion.

The financial markets don't know what that the ECB is likely to do today at its meeting.

There've been lots of clues that a cut could be on the cards but just as many urging caution.

ECB's communications gap

Once again, questions have been raised about the Bank's communications policy.

A bank should always retain the ability to surprise but it must also lead the markets gently, always clear on roughly which way policy is going.

It is an area where the bank now appears to be failing miserably.

Its most outspoken critics argue the bank still has plenty to learn about running an economy - even after almost three years in charge of Europe's most ambitious project, managing the single currency.

The European economy probably does, on balance, require an interest rate cut to keep growth up in the midst of a global downturn and if it doesn't come at Wednesday's meeting there will be repercussions.

Many on the foreign exchanges may once again decide to take out their frustration on the troubled euro, selling it as a way of telling the bank that it still lacks credibility as an institution responsible for guiding one of the world's major economies.