Hopes for stimulus rise after ECB softens tone

 

 

Prospects for leading nations to agree on joint action to avert a global economic downturn brightened on Friday after the European Central Bank softened its tone and underlined high uncertainty to the economic outlook.

 

Group of Seven (G7) finance ministers and central bank governors began arriving in Tokyo for meetings on Saturday to discuss ways to tackle deteriorating economic growth and market turmoil. They are expected to deliver no new message on exchange rates.

 

The ECB left interest rates on hold on Thursday, but markets saw more scope for rate cuts this year after ECB President Jean-Claude Trichet dropped a threat to act pre-emptively against inflation and stressed risks to the economy.

 

It is "a change that goes in the right direction", a G7 government official said of Trichet's comments.

 

A draft of the communique to be issued after Saturday's gathering of G7 – Britain, Canada, France, Germany, Italy, Japan and the United States – says the global economy is facing "a more challenging and uncertain environment" than at the time of the group's last meeting in October.

 

But the draft, read to Reuters by another source on Thursday, added that global economic fundamentals remained "solid".

 

Ahead of the Tokyo meeting, the IMF cut its global economic growth forecast to a five-year low of 4.1 per cent for this year, down from an initial estimate of 4.4 per cent.

 

"It is true that economic sentiment is worsening in both the US and Europe," said Susumu Kato, chief economist at Calyon Securities in Japan.

 

"I think the ECB will cut rates by the middle of this year."

 
 

European Rates

 

A Reuters poll showed most economists still expect a 25 basis point ECB cut to 3.75 per cent by June, unchanged from last week, but analysts brought forward the timing of a second cut to the third quarter from the fourth.

 

In addition to the Federal Reserve's big rate cuts in January, the Bank of England lowered interest rates for the second time in three months on Thursday, underscoring worries about a worldwide economic slowdown.

 

Still, the G7 meeting is unlikely to see any announcement on coordinated monetary easing or other stimulus measures, as different economic problems and policy priorities weigh on the group of the world's rich nations.

 

Whether the emerging economies can come through the US shakeout relatively unscathed will be on the agenda when G7 officials meet with finance ministers of China, Indonesia, South Korea and Russia for dinner on Saturday.

 

The head of the Asian Development Bank, Haruhiko Kuroda, said on Friday fiscal stimulus could be an option for emerging Asian economies if global growth slows further but the main concern for now is to contain inflation.

 


Less heat on forex?

 

While focusing on fallout from the US slowdown and market jitters, the G7 club is unlikely to single out foreign exchange rates this weekend.

 

"Exchange rates will be less important this time than discussions on the economic climate and responses to the crisis," the first G7 source, speaking to reporters in Tokyo, said.

 

In October the finance ministers stressed the need for an accelerated appreciation of the Chinese yuan while repeating that excess volatility and disorderly movements in exchange rates are undesirable for economic growth.

 

Europeans are concerned about the euro's rise after the Fed's big rate cuts and resist the idea that the euro alone is shouldering the burden of adjustments in global imbalances.

 

Europe's largest business organisation called on G7 finance leaders' to show a clear commitment against further euro appreciation.

 

"Compared to the outcome of the G7 last October, when they addressed only China -- it is not only China which is a problem. Others are also a problem," Philippe de Buck, BusinessEurope secretary-general, told Reuters in an interview. (Reuters)

 
 
 
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