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Monday, June 02, 2003

To Cut or Not to Cut

Well the European data are pretty much as expected, we're on the way down:

Eurozone manufacturing industry slid closer to the brink of renewed recession in May, a leading business survey showed on Monday, raising pressure on the European Central Bank to cut interest rates at its next meeting. The unexpectedly sharp drop in the Reuter/NTC Research purchasing managers' index for manufacturing, which hit its lowest level for 16 months, dashed lingering hopes of a recovery soon in the 12-nation bloc.

Economists said the data pointed to a renewed weakening of the eurozone economy in the wake of the Iraq war as the surging euro, which climbed above its launch rate in late May, depressed export orders, a key pillar of growth. "There has been no Baghdad bounce.. not even a Baghdad blip and the pressure on the ECB to cut by 50 basis points" at its rate setting meeting on Thursday "has moved higher still", said Robert Prior of HSBC. NTC Research said the drop in the PMI, which fell from 47.8 in April to 46.8 in May, even further below the 50 mark that separates growth from contraction, reflected an accelerating decline in output, new orders and employment. The PMI data were released as a "flash inflation estimate" from Eurostat, the European Union's statistics office, showed price pressures subsiding, increasing the ECB's room for manoeuvre on interest rates.

Eurostat said inflation fell from 2.1 per cent in April to 1.9 per cent in May, below the ECB's 2 per cent price stability ceiling for the first time in almost a year. Economists said the decline was an added reason for an aggressive move. In recent days Lucas Papademos, the ECB's vice-president, Ottmar Issing, its chief economist, and several governing council members have signalled there is room to relax the bank's monetary stance. But economists fear that the ECB may err on the side of caution and cut rates by just 25 basis points, as it did in March this year. That might signal a split on the ECB council, with the hawks not yet convinced of the urgency of more easing.
Source: Financial Times

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