The cost of borrowing looks set to fall today when the European Central Bank (ECB) cuts interest rates for the first time in over a year.
Analysts believe the ECB's governing council could cut rates by as much as 0.5 per cent when it meets in Frankfurt today. The governing council was divided last month over whether to cut interest rates. But the ECB's President, Mr Wim Duisenberg, said this week that recent events had strengthened the case for a rate cut.
A 0.5 per cent rate could would be welcomed by markets as a bold, decisive move that could boost the euro zone's flagging economic growth. But cutting rates by just 0.25 per cent would leave the ECB with more room to cut again in the future.
The depth of the euro zone's economic difficulties was underlined yesterday with the news that unemployment in Germany has risen above the politically sensitive figure of four million, reaching its highest November level in five years.
The rise, which took the unemployment rate to 9.7 per cent compared with 9.4 per cent in October, affected in particular the formerly communist east of the country. The unemployment rate in eastern Germany hit 17.6 per cent, compared with 7.8 per cent in the west of the country.
The data was worse than analysts had expected and when seasonal factors were taken into account, the November unemployment record looked even gloomier, rising 35,000 from October to 4.161 million. The figures came shortly after the release of data showing that German retail sales fell unexpectedly in October.
The European Commission predicted yesterday that the euro-zone economy would grow by between 0.2 per cent to 0.5 per cent in the fourth quarter of 2002 compared to the previous quarter. For the first quarter of 2003, quarter on quarter growth is forecast to be in the range of -0.2 to 0.2 per cent. But the Commission forecasts a gradual recovery in the course of 2003.
The forecast is based on a number of indicators, including the number of car registrations in the euro-zone and private consumption in the euro area as reflected in the opinion survey on the present business situation in the retail sector.
