ECB, BOE May Follow U.S. Fed Cut, Economists Say

(Bloomberg) -- The European Central Bank and the Bank of England may have to follow the Federal Reserve and cut interest rates as the risk of a U.S. recession threatens to drag down a global expansion, economists said.

``From a European and a U.K. perspective, the Fed cut adds to the risk of more and quicker rate cuts,'' said Amit Kara, an economist at UBS AG in London. Kara, a former economist at the U.K. central bank, predicts four cuts from the Bank of England this year and two by the ECB.

The Fed today lowered its benchmark rate in an emergency move for the first time since 2001 after global stock markets tumbled amid signs the world's largest economy is sliding into recession. The move spurred a rally in European stocks, though failed to stem a decline in U.S. indexes.

The widening interest-rate gap between the U.S. and Europe may spur gains in the euro, worsening the outlook for an economy already showing signs of a slowdown by hobbling exports. German investor confidence dropped to the lowest since 1992 in January and European manufacturing growth slowed in December.

``This market has been calling for help,'' said Alberto Espelosin, who helps to manage about $12 billion at Zaragoza, Spain-based Ibercaja Gestion. ``The ECB should follow suit.''

The Bank of Canada, in a scheduled meeting, lowered its main rate by a quarter point today to 4 percent and signaled it will act again to shield Canada from the U.S. slowdown.

Yields Fall

Investors are increasing bets Europe's two major central banks will cut borrowing costs, interest-rate futures trading shows. The ECB's benchmark rate is currently 4 percent, while the Bank of England's 5.75 percent is the highest among the Group of Seven industrial nations.

The yield on the June ECB contract fell to 3.80 percent today from yesterday's close of 3.94 percent. On the June U.K. contract, the yield fell 3 basis points to 4.89 percent.

The ECB and the U.K. central bank refused to give away their intentions. The Bank of England said it has no plans to bring forward next week's meeting of the Monetary Policy Committee, which is scheduled for Feb. 7. ECB council member Juergen Stark declined to comment on the Fed's decision when questioned by reporters in Brussels.

The Swiss National Bank also declined to comment, as did spokespeople for the central banks of Norway and Sweden.

The euro, which touched a record $1.4967 on Jan. 23, rose 1.1 percent to $1.4619 at 6:08 p.m. Frankfurt time after the Fed's announcement. The pound climbed 0.8 percent to $1.9592.

`Forced to Act'

``If it becomes clear that this is merely a temporary fix, and the situation deteriorates further, then the ECB will be forced to act,'' said Ken Wattret, an economist at BNP Paribas SA in London.

While David Brown, chief European economist at Bear Stearns Cos. in London, predicted the Bank of England will cut its rate next month and the ECB will do so in the second quarter, he ruled out either following the Fed in reducing rates outside their normally scheduled meetings, as they did in September 2001.

``It's not their style,'' said Brown. ``European central banks tend to move by the calendar.''

European inflation at a six-year high of 3.1 percent, breaching the ECB target of just below 2 percent, is limiting policy makers' room for maneuver. President Jean-Claude Trichet said Jan. 10 that the bank is ready to act ``preemptively'' to raise rates to contain consumer prices.

 

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