A cut in European interest rates next month looks almost certain following the US Federal Reserve decision to cut rates by 50 basis points yesterday while warning of possible global recession. The US authorities also warned that the US slowdown could extend into the second half of the year. The European Central Bank governing council meets on April 11th and will now face pressure to cut rates in response, despite its currently expressed view that Europe is relatively immune from the US slowdown. Irish commentators pointed to the reference in the Federal Reserve's statement to the possibility of a global economic slowdown as an indication that US authorities would like to see co-ordinated action by other banks.
"It makes it likely we will see a cut by the Bank of England next week and may serve as a wake-up call to the ECB, which has taken the view that Europe remains relatively immune to the world's problems," according to Mr Austin Hughes, economist with IIB Bank in Dublin. "The ECB has to realise that the Fed is doing this for a good reason - it is not just top-of-the-head stuff," said Mr John Beggs, economist with AIB. Mr Beggs predicted that the European authorities would cut rates before Easter, probably at their April 11th meeting. He expects the ECB will cut by 25 basis points, bringing the European base rate to 4.5 per cent. Dr Dan McLaughlin, economist with Bank of Ireland, also predicts a rate cut. "If growth in the US is potentially at zero or 1 per cent, it does not seem credible it could continue without having an impact on the European economy. The bottom line is that we will see a rate cut in Europe - the rhetoric will change from the ECB," he said last night. The US authorities' decision to cut rates by only 50 basis points - as against the 75 per cent that some had predicted - is a significant gamble, according to Mr Hughes. "Cutting by 50 basis points but at the same time suggesting risks are greater than they were the last time the Fed cut which leaves the market with the question: `Why did they not do a bit more?"' he said. The Federal Reserve is calculating that the 50 basis point cut plus an indication that further cuts are contemplated will be enough to prop up US equity markets.
"The Fed had to avoid panicking the real economy by pandering to the stock market. If they had cut by 75 basis points it would have sent the message to consumers that there is a crisis," said Mr Beggs.
Such action would have been unwarranted given the strength of the non-manufacturing parts of the economy and the fact that unemployment is only at 4.2 per cent, he said. Implicit in the Federal Reserve statement is that the bank will watch the economic numbers and if the data justifies it they will cut again, he predicted. Rates could come down by another 1 percentage point, he said. The Open Markets Committee was due to meet again on May 16th but had left the door open to cutting rates again before the meeting, said Dr McLaughlin. "The have pointed to what they believe is the main causes of the slowdown, which is that company profitability is down and this is affecting investment. The associated fall in the equity markets is affecting consumption," he said. "It will be a nervous time until May 16th," said Mr Hughes.
