Eurozone rate cut surprise

ECB makes a surprise cut to eurozone interest rates

The European Central Bank (ECB) has surprised financial markets and cuts its key interest rate by a quarter point to 4.5%.

The news gave a brief boost to the European single currency, the euro, against the dollar, and triggered a surge in share prices in Frankfurt and Paris.

In London, meanwhile, the Bank of England announced its third rate cut this year, by a quarter point to 5.25%.

The bank's move had been widely anticipated, though.

The ECB was the last of the big central banks to cut rates, after it had insisted for months that it was more concerned about inflation in the 12 country eurozone than worries about a global economic slowdown.

"It's a surprise. It really means that transparency is not an issue as far as they are concerned," said Jeremy Hawkins at Bank of America in London.

"There may be an initial positive knee-jerk reaction from the asset markets, but at the end of the day the problem is it's 'too little, too late'," he said.

Why cut?

It was only the second rate cut in the ECB's history, and most market watchers had expected that the bank would stand firm in the face of criticism that it was doing too little to shield the eurozone from the impact of the economic trouble in the United States.

The rate cut was the result of lower inflationary pressure and a fall in consumer credit growth, ECB president Wim Duisenberg said after the decision on interest rates was announced.

He also noted that the rise in inflation had not spilled over into wage raises and predict eurozone inflation would fall to below 2% in 2002.

Rates were now at an appropriate level to maintain price stability, he added.

Earlier on Thursday, the Bank of England had cut its key rate for the third time this year - by a quarter point to 5.25%.

The most active bank on the interest rate front was the Federal Reserve in the United States, which has cut rates four times this year, each time by half a percent. US rates are now at 4.5%.

Mr Duisenberg said again that the US economic slowdown has had only limited impact on eurozone growth.

The final straw

Recent ECB comments signalled it was focused on price rises, with inflation running at 2.6% in March and likely to edge up further in April.

But German industrial production, orders and jobs data this week set alarm bells ringing that the largest economy in the eurozone was heading for recession.

"Finally they have woken up and I guess the bad numbers from Germany at the start of the week have made them realise they had gone too far in denying the need for a rate cut," said Bernard Walschots at RaboBank in the Netherlands.

But other economists fear the cut will fuel inflation.

"The inflation numbers are going to be worse," said economist Klaus Baader of Lehman Brothers.

He added that the ECB cannot justify its decision as a reaction to this week's German economic data.

"After all, they are supposed to make policy for the euro area and not just for Germany," he said.