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ECB expected to hold rates
FRANKFURT, Germany -- The European Central Bank will likely keep rates on hold next week even as evidence mounts that Germany, the region's biggest economy, is showing few signs of recovery. The latest bad news for the ECB -- which meets on Thursday to decide on rates -- came on Friday as a closely-watched survey showed consumer confidence in Germany was wavering amid rising unemployment, tax increases and ongoing nationwide strikes. The Nuremburg-based market research group GfK said its economic expectations index fell to minus 26.6 in December from 25.7 in the previous month. That was the lowest level since November 2001 when Germany was in the midst of recession. "The outlook for consumer sentiment in the next months could also best be described as modest," GfK said. "Tax increases as well as the weak labour markets stand in the way of lasting improvement in consumer sentiment until probably mid-2003." The central bank lowered it key lending rate by a half percentage point to 2.75 percent in December. It was the first change in borrowing costs since November 2001. Prior to that, the ECB cut rates four times in one year in an effort to rescue the 12-nation euro zone from the grips of the global economic downturn. Euro zone growth remains sluggishThe euro zone is still struggling to eke out meagre growth, expanding by just 0.8 percent in 2002. The Organisation for Economic Cooperation and Development has trimmed 2003 growth forecast for the euro zone to 1.8 percent in 2003 and 2.7 percent in 2004 -- slightly above the consensus forecasts, but tempered by concern over the fragile state of the manufacturing sector as exports and consumer demand remain weak. The ECB has also cut back its forecasts, saying growth will be limited to between 1.1 and 2.1 percent in 2003 and between 1.9 and 2.9 percent in 2004. And while the euro zone unemployment rate is running at 6.8 percent, Germany's is above 9 percent. But despite the region's sluggish performance, many economists expect the ECB to hold off adjusting rates this time around but could begin cutting again in June. "The ECB will grasp the opportunity to weigh up what is a potentially hazardous macro environment... geopolitical factors are a very real threat to economic recovery. It is this which we expect to tip the balance in favour of a cut in the spring,'' Ken Wattret, an economist at BNP Paribas, told Reuters. Added Adolf Rosenstock of Nomura International: "There is not enough confidence in the recovery... That is why people are still forecasting the ECB will cut rates again.'' Stronger growth in the United States could boost euro zone exports and growth, but the threat of war and job losses has sapped confidence and heavily indebted U.S. consumers are tightening their belts. "During the course of this year the euro zone will pick up slightly,'' Volker Nitsch, of Bankgesellschaft Berlin, told Reuters. "We expect an improvement in the U.S. economy and we think the risk from Iraq will dissolve in the first quarter of 2003.
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