ECB may cut half point off rate

The European Central Bank (ECB) is expected to cut interest rates by up to half a percentage point when its Governing Council meets in Frankfurt today, writes Denis Staunton,  European Correspondent

Falling inflation, slow economic growth and the euro's rise against other currencies are likely to persuade the central bankers that lower interest rates could boost the euro-zone economy without creating a risk to price stability.

Belgium's finance minister, Mr Didier Reynders, yesterday became the latest in a succession of European politicians to call for a rate cut by the ECB.

"I have been repeating for several weeks that there is more room for manoeuvre in terms of monetary policy than budgetary policy," he said.

Mr Reynders said that recent remarks by leading figures at the ECB had prepared financial markets to expect a cut in interest rates.

"There comes a moment when a decision has to be taken because you cannot keep on announcing changes to the markets and then not come to a decision.

"There is not a lot of room for manoeuvre to make changes in a budgetary sense," he said.

The German chancellor, Mr Gerhard Schröder, indicated yesterday that his government could breach the Stability and Growth Pact for a third year running in 2004.

Mr Schröder told Germany's electricity association that the rules demanding that euro-zone countries must keep their budget deficits below 3 per cent of GDP must be respected only "to the extent it is possible".

Berlin has already said it will breach the 3 per cent ceiling in 2003, arguing that it is inappropriate to make deep budget cuts or increase taxes at a time of sluggish economic growth.

German manufacturers, who will be hit hard by the euro's rise against the dollar, are hoping that the ECB will cut rates to 2 per cent today.