Expectations are growing that the European Central Bank (ECB) may cut interest rates this week after the bank's chief economist, Mr Otmar Issing, warned of a slowdown in economic growth in the euro zone.
Mr Issing's comments over the weekend follow earlier comments by EU Monetary Affairs Commissioner Mr Yves-Thibault de Silguy, who said that the European Commission will cut its 1999 growth forecast to close on 2 per cent tomorrow, paving the way for the ECB to cut rates if it wants to.
The move will bring the Commission's forecast into line with those of private sector analysts, who on average see euro zone gross domestic product rising 2.1 per cent this year. With official growth forecasts in Italy and Germany, which together account for 50 per cent of the 11-nation monetary union's economy, having been scaled back, it would have been difficult for the executive, famous for its rose-tinted view of the EU economy, to have done otherwise. More importantly, the move could pave the way for the ECB to trim its main 3.00 per cent refinancing rate.
The ECB's bearish growth outlook has fanned European rate cut hopes this past week. Commenting on the current price outlook, Mr Issing said that price developments showed neither inflationary nor deflationary tendencies.
Asked about the euro's recent weakness against the dollar, Mr Issing said the development was mainly due to a surprisingly positive economic development in the US, but that European political turmoil had added to the fledgling currency's plight.
"Political irritations surely added to the [euro's] weakness in international foreign exchange markets," Mr Issing said. "But the main reason for the foreign exchange developments since January 4th is the strength of the dollar," he added.
Also, Mr Issing said, the constantly bemoaned historic lows of the euro are not a big problem. "When I read in the media that the euro hit a historic low, then one almost has to laugh. The euro is barely three months old - everything we observe is either a historic low or a historic high. Almost anything that happens, happens for the first time," Mr Issing said.
"We do not have an exchange rate target. The exchange rate is an element in our analysis. And - as it used to be - it is an important price even though its significance has diminished compared with the former situation in the individual countries," Mr Issing said.
Turning to fiscal policy, Mr Issing reiterated his disappointment over euro member-states relaxing efforts to cut budget deficits and their failure to seize the chance of last year's buoyant economic growth to reduce structural deficits.
The US Federal Reserve is also expected to be in the spotlight, with the March jobs report, due out on Friday, likely to inject some excitement into markets even if tomorrow's meeting of the Fed's Open Market Committee (FOMC) does not.
Economists are looking for the FOMC, the Fed's policy-making arm, to leave interest rates unchanged given that the high 6.1 per cent annual growth rate achieved by the US economy in the fourth quarter of 1998 has yet to fan inflation.
Traders are therefore likely to be concentrating more on the US non-farm payrolls and earnings data released later in the week. "Nobody is expecting anything from the Fed, so the non-farm payroll, particularly the earnings side, could be more of an issue for the market," said Mr Jeremy Hawkins, chief economic adviser at Bank of America in London.
"The Fed must have breathed a sigh of relief last month when it saw wages come off but any sign that that was an aberration will spook the bond market and also take the equity market down," he warned.
