European Central Bank Cuts Interest Rates

Wim Duisenberg, the president of the European Central Bank, made good on a pledge Thursday. At a meeting last month, Duisenberg said the bank "would not hesitate to act" on interest rates if new signs of economic weakness emerged.

The bank's 18-member governing council took just this step in Frankfurt on Thursday, cutting rates for the second time in three months in an effort to revive the world's second largest economy.

Three months ago, the banks' leaders had cut rates from 3.25 percent to 2.75 percent in their first rate decision in a year. Thursday's decision followed that decrease, with a rate cut to 2.5 percent - the lowest level ever.

Bankers worried about economy

The decision aligns the European Central Bank with other central banks in Europe which are growing increasingly concerned about sluggish economies across the continent. The Bank of England held its key interest rate steady at 3.75 percent Thursday, one month after trimming it to its lowest level for 48 years, and Norway's central bank on Wednesday also cut rates by half a point.

Duisenberg said the bank cut the rates because the leaders saw no inflationary pressures building in the economy - inflation being the bankers' top priority.

"The outlook for price stability over the middle term has improved over the past months, particularly because of restrained growth and the latest currency developments," he said.

Inflation in the 12 countries that use the euro currency remains above the bank's 2 percent target. But core inflation -- which excludes more volatile food and energy prices -- has been slowing more quickly than anticipated.

Euro gaining strength

Meanwhile, the euro has been climbing against the dollar. The currency topped $1.10 for the first time in nearly four years Wednesday amid concern that war in Iraq could disrupt the U.S. economy. It traded at $1.09 at midday Thursday in Europe.

At the same time, economies in Europe have been sluggish, with growth in the economies of the eurozone countries' not exceeding 0.8 percent last year. The economies of all 15 European Union members did not fare much better, rising 0.9 percent, comparing to rates of 1.4 percent and 1.5 percent in 2001.

Moreover, the outlook for the first part of 2003 is gloomy: The European Commission envisions a possible drop in the eurozone during the first quarter and an increase of 0.2 percent in the second.

Potential war causes uncertainty

The rate cut is aimed at improving those results. But the bankers have one issue hanging over their heads that they cannot control -- a possible U.S.-led war against Iraq and the potential economic turbulence it could cause.

"The increasing tensions in the world turn every economic forecast into a fleeting snapshot," the Halle Institute for Economic Research noted on Thursday.

Duisenberg acknowledged this fact on Thursday and appeared to leave open the possibility of further moves. "Any judgment on future developments is overshadowed at present by the geopolitical tensions and their potential resolution," he said, adding that the ECB "stands ready to act decisively and in a timely manner."