E.U. doubts efficacy of U.S. interest rate cut

By Batuk Gathani

BRUSSELS, FEB. 3.Senior bank officials and financial analysts in the European Union's financial capitals have greeted the U.S. Federal Reserve's decision to cut interest rates by half a point or per cent, to give a boost to the slowing economy, with mixed feelings.

According to the latest data, the U.S. economic growth rate was at its lowest in the fourth quarter of 2000 in five years. In recent weeks, the European Central Bank (ECB) has commented on the ``increasing uncertainty'' triggered by the slowdown and its impact on the E.U. particularly and the rest of the world generally.

At the bank governing council's routine Thursday meeting, there was no indication of any drastic change to alter its fiscal and interest policy, despite the grim economic outlook in the U.S. and Japan. The bank is in fact more worried about the jump in the European inflation rate due to wage rises and increased government spending. The bank had raised the euro interest rate six times last year to arrest inflationary pressures. Recently, in the background of the decreasing oil prices and newly found strength of the euro, it is not likely to further tamper with the rate. The Europeans are watching how the American financial and stock markets respond to the interest cut which so far has been discounted by the markets.

The Federal Reserve's perception is that technology advances and productivity improvement should support future U.S. economic growth. According to the Europeans, this remains to be seen in the background of many looming question marks about the health of the U.S. economy. The Federal Reserve has indicated that if there is no significant spurt in the U.S. economic growth rate, the U.S. interest rates may even fall further.

The bottomline - according to European analysts - is whether the U.S. authorities can either bypass or contain the impending recession in the U.S. as the American crises are further compounded by significant slowdown in investment and decreasing consumer confidence. The U.S. retail and wholesale sales are down, with building up of heavy inventories and this could affect manufacturing.

Though, not on the same scale, current European economic and trade data is also causing concern. However, many Europeans are not convinced that a drastic cut in the interest rate is the remedy. In the E.U. financial capitals, there is more concern about the rising ``debt mountain'' in the U.S., both at consumer and corporate levels as this could have serious consequences for the U.S. bank loans. Hence, it remains to be seen if lower interest rates could have any significant impact on highly indebted individuals and companies, to carry on indefinitely borrowing and spending despite slowing economy.

The ECB may not be inclined to follow the example of the Federal Reserve as the Europeans are more concerned about inflationary pressure and stabilising employment. The European unemployment has fallen slightly and remains unchanged at 8.7 per cent compared to 9.6 per cent a year ago. The European economic growth rate may not exceed three per cent per annum. The German Finance Minister, Mr. Hans Eichel, has predicted that the German growth in the current year may hover around 2.75 per cent compared to 3.1 last year.

Some analysts speculated that the bank may be prompted to cut the benchmark interest rate by a quarter per cent from its current 4.75 per cent, later in the year to contain inflationary pressure, sustain economic growth and maintain the health of the euro against dollar. But there is a psychological change in investor `mentality' and many Europeans feel that the Federal Reserve's remedy `may not do the trick' to contain the U.S. recession.

The latest economic data indicates slow-down in the U.S. economic growth. In the U.S., it remains to be seen if the strategy of reducing the interest rate to 5.5 per cent from six per cent could work. The Europeans feel that the U.S. economy is now facing the most serious economic challenge, since the U.S. economy embarked on its record breaking expansion 10 years ago.

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Section  : International
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