ECB rate cut possible following "serious" debate

BRATISLAVA/FRANKFURT Fri Dec 7, 2012 8:00pm IST

The Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt December 6, 2012. REUTERS/Lisi Niesner

The Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt December 6, 2012.

Credit: Reuters/Lisi Niesner

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BRATISLAVA/FRANKFURT (Reuters) - A European Central Bank policymaker said on Friday the bank had had a "very serious" debate about cutting interest rates this week and that a cut was possible next year if the euro zone economy does not pick up.

The German and Austrian central banks separately suggested such a pick up is unlikely, forecasting scant growth in their economies in 2013.

The ECB kept interest rates on hold on Thursday, but Governing Council members held "a wide discussion" about cutting interest rates from their current record low of 0.75 percent.

Jozef Makuch, one of the Council members, used the term "very serious" on Friday to describe the debate.

"If the situation does not improve, and there is relatively a small chance there will be a significant improvement, it is possible to expect a move in interest rates next year," said Makuch, who is also the governor of Slovakia's central bank.

The latest growth forecasts paint a gloomy picture.

The Bundesbank expects Germany's economy to grow just 0.4 percent next year, down from a June forecast of 1.6 percent. The new projection is marked by "a high degree of uncertainty", it added, and "the balance of risks is on the downside".

Austria's central bank cut its 2013 growth forecast for the country's export-dependent economy to 0.5 percent from the 1.7 percent it had expected in June, due to the global downturn, weak investment and sluggish consumer spending.

The downward revisions come a day after the ECB lowered its forecasts for next year, pointing to weaker growth prospects for the bloc's core countries such as Germany, France and the Netherlands.

"Given the difficult economic situation in some euro-area countries and widespread uncertainty, economic growth will be lower than previously assumed," the Bundesbank said.

"The cyclical outlook for the German economy has dimmed. Enterprises are cutting back their investment and hiring fewer new staff," the German central bank added.

Germany has been a key growth driver of the euro zone, now in its second recession since 2009, but the country's resilience to the crisis is wearing thin and the central bank's new projections reflect this.

Germany could even enter a recession -- defined as two consecutive quarters of negative growth -- the Bundesbank said: "There are even indications that economic activity may fall in the final quarter of 2012 and the first quarter of 2013."

The euro, which had dropped earlier in the day against the dollar after the growth forecasts were published, extended its fall after Makuch's comments.

Economists expect the German economy to contract in the fourth quarter but to improve as soon as in the first quarter.

"The Bundesbank is quite negative about next year," said ABN Amro economist Aline Schuiling. "What we are currently seeing is more and more evidence that the global industrial cycle is bottoming out."

INDUSTRY SUFFERS

Industrial orders and output have dropped in recent months, with exports falling at their fastest pace since late last year.

German industrial production fell by a much steeper-than-expected 2.6 percent in October, weighed down by weaker output in the construction sector and in investment goods, Economy Ministry data showed on Friday.

Auto industry association VDA said on Tuesday German new car sales could fall to the second-lowest level in more than two decades next year, as demand is hit by the euro zone crisis.

But some German economic data over recent weeks has been encouraging, with business morale rising for the first time in seven months and unemployment growing less than expected.

In Berlin, the German government was cautiously optimistic the economy will continue to grow.

"We have no doubt that we are still growing," Chancellor Angela Merkel's spokesman Steffen Seibert told reporters. "There are many indicators and they don't all point to a recession. The government is cautiously optimistic that we'll keep growing."

The Bundesbank said the slowing of the global economy, as well as recessions in other euro zone countries, were dragging on the German economy. But "the Bundesbank does not see a protracted slowdown but instead anticipates a return to growth path soon", it added, forecasting 2014 growth of 1.9 percent.

Austria's central bank forecast its economy would grow by 1.7 percent in 2014.

Austrian central bank chief Ewald Nowotny said his bank assumed the euro zone economy would reach its nadir in the fourth quarter, but past experience had shown expectations were not always met on time. "I hope this is not the case but I cannot rule it out," Nowotny said. (Additional reporting by Sakari Suoninen, by Michael Shields in Vienna and Gernot Heller. Editing by Jeremy Gaunt)

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