Deseret News, Thursday, August 30, 2001

European Central Bank cuts rate to boost economy

Associated Press

FRANKFURT, Germany — The European Central Bank cut its main interest rate by a quarter of a percentage point Thursday, making only its second cut this year following heavy pressure for a reduction to spur flagging economic growth.

The bank had long highlighted its concern about inflation in the 12-nation euro zone, easing borrowing costs only once as the U.S. Federal Reserve cut rates seven times.

But with prices increasing more slowly in recent months, it decided it was safe to join other central banks in easing rates to try to head off a global slump.

"Available evidence points to an improvement in price developments," ECB President Wim Duisenberg said at a news conference in Frankfurt to explain the decision, which many analysts had expected.

He admitted the bank had misjudged the economic slowdown in the United States. "I don't think we underestimated the impact — what we did underestimate was the length and severity of the U.S. slowdown."

Analysts said Thursday's ECB decision was welcome, but cautioned against overestimating its impact.

"I think the market will be happy that they cut the rates," said Jane Foley, an analyst with Barclays Capital in London. "It should help promote the view that we are at least having policy oriented toward growth."

But she noted that much of the economic data in the euro-zone economies remains grim and said it was unlikely Thursday's reduction would have much immediate impact.

Stefan Schneider, an economist at Deutsche Bank, said that "it was expected and I don't think it should be overestimated."

Interest rates are the ECB's main tool for controlling inflation in the European Union nations using the region's common currency, the euro.

By raising its rate, the bank can discourage borrowing and dampen the risk of inflation. By lowering it, the bank makes loans cheaper as a way of stimulating the economy.

Thursday's move lowered the bank's main interest rate to 4.25 percent.

http://deseretnews.com/dn/print/1,1442,295021248,00.html?

-- Martin Thompson (mthom1927@aol.com), August 30, 2001

Answers

Too little. Too late. I can't understand what's going on with the Europeans. Greenspan started the year with a between-meetings (itself highly unusual) half-point rate cut, and has been working frantically ever since to get rates low enough to avert a recession. Now here come the Europeans with only their SECOND cut of the year (against our seven)--a minimal quarter-point, and talk airily about, gee maybe inflation isn't the main threat after all, and we should get into the act.

They have REALLY been asleep at the switch.

-- JackW (jpayne@webtv.net), August 30, 2001.

Gloom, gloom, gloom, that's about all I read here. I heard an analyst from Goldman Sachs today on the radio say this is nothing, we'll be coming out of all of this late this year, and everything will be okay. Why do so many people disbelieve this?

-- Polly-Anna (polly-anna@webster.net), August 30, 2001.

Who was the guy in the old Li'l Abner comic strip who always had a dark, cloud-like halo haning over his head? I think he's a man for the times. It's hard not to be gloomy right now.

-- R2D2 (r2d2@earthend.net), August 30, 2001.

I'll tell you why Goldman is full of BS and the gloomers are "sadly" right on the money. Last year over 4 trillion dollars was lost in the US stock market; 10 trillion was estimated to have been lost world wide. Those loses dwarf the loses incurred in 1929. Anyone who thinks that that kind of money can be lost without major consequences to the economy of the world is in dreamland. Analysts like this Goldman talking head are just doing their part to keep the sheeple invested long enough to get sheared by the big investment firms. This same story has been played out time and time again in financial history; each time the talking heads assure the public that "this time it's different", and each time the poor, optimistic souls lose their shirts. When will they ever learn?

As for the ECB and rate cuts; they know exactly what they are doing. Watch what happens when the Euro finally goes into physical circulation on January 1st. How many countries will opt to trade their US dollars in and use Euro's as reserve currency? The potential amount of US dollars that hit the market will make inflation soar here and the Euro will get a boost that will set the stage for challenging the US dollar as an equal in world reserve currency. The next few months will be history making and if events unfold as they currently are, Bush will be the next Herbert Hoover.

-- Meg Davis (meg9999@aol.com), August 31, 2001.