ECB to cut rates if war-induced recession looms

Emergency plans to stop the Iraq war pushing the European economy into recession were last night finalised by EU finance ministers, after the European Central Bank (ECB) signalled it is ready to cut interest rates if needed.

In a statement after meeting in Frankfurt, the ECB's governing council said it "stands ready to act" and promised to provide liquidity in the event of shocks to the financial system.

EU ministers also agreed to send a reassuring message to the markets that they would not use the war as an excuse to relax budgetary discipline.

The plans were agreed last night by finance ministers at the EU summit in Brussels, in co-operation with ECB president Mr Wim Duisenberg.

The Iraq conflict dominated the start of the two-day EU summit, with many fearing the talks could degenerate into fierce recriminations between EU leaders. There was broad agreement on the need for Europe to present a co-ordinated response to any economic shockwaves.

European finance ministers also tried to quell speculation that the EU's stability pact - the tough budget rules for the euro - would be suspended because of the "exceptional circumstances".

That position was reflected in a statement from the German finance ministry, which is having the greatest difficulty staying within the pact's deficit limit of 3 per cent of GDP.

"Together with our European partners we have possibilities within the pact to react to a deep plunge in the world economy as a result of international events," a finance ministry spokesman said. "There is no reason to speculate about a deviation from the contents of the pact."

On interest rates, the bank said it was "not possible to conclusively assess the short and medium-term implications [of the war\] for the euro area", and stressed the importance of sticking to its mandate of delivering price stability. But analysts said its statement reinforced expectations that rates would be cut if the war appeared to be hitting the euro zone's economy. - (Financial Times Service)