Prospects of euro-zone rate cut fade as economic confidence rises

The prospect of an early cut in euro-zone interest rates receded further yesterday after a survey by the European Commission showed economic sentiment improving for the first time in four months. The Commission's sentiment index for December, based on a monthly survey of thousands of businesses and individuals, rose to 103.3 from 103.2 the previous month.

Analysts interpreted the data as evidence that Europe can expect strong economic growth in 2001, despite an expected downturn in the US economy. This analysis reinforces the view expressed by the ECB that robust growth in the euro zone can sustain interest rates at their present level.

Economic sentiment rose most sharply in Ireland, Austria and Belgium and the survey showed that the rise was led by consumers, whose confidence increased in 11 of the 12 euro zone countries and remained steady in Portugal.

Industrial confidence was stronger than expected, remaining stable despite signs from other surveys of a slowing of growth in France and Germany. Indeed, Germany yesterday reported a fall in industrial orders in November. Confidence in the construction industry fell slightly and the recent fall in share values was reflected in an easing of the share price component in the overall index.

The upbeat nature of the Commission's survey is in sharp contrast to recent reports by leading German economic think tanks that predict a slowdown of economic growth in the euro zone during the coming months. The Berlin-based DIW this week blamed the ECB's succession of interest rate increases last year for the slowdown and called for interest rate cuts to boost consumer spending within the euro zone.

The ECB remains confident, however, that the euro zone can weather any storm caused by a downturn in the US and that there is no need to change its monetary policy.