Case for ECB rate cut grows

The case for an imminent cut in euro-zone interest rates was boosted yesterday as fresh data pointed to declining inflation and persistently weak consumer and business confidence across the 12-state currency area.

Figures released by the EU's statistical agency show euro-zone inflation dipped slightly from 2.3 per cent last December to 2.2 per cent in January. The move brings inflation closer to the ECB's targeted ceiling of 2 per cent, and sits well with policymakers' predictions that price growth will ease across 2003.

Mr Ernst Welteke yesterday became the latest member of the European Central Bank's rate-setting council to forecast weak growth and inflation in the euro zone, further cementing hopes that a rate cut is due.

"The inflation rate in the next few months is expected to be moderate and gives room for monetary policy measures," Mr Welteke told reporters in Germany.

Separate data on economic confidence, meanwhile, showed neither consumers nor businesses were in the mood to engineer a recovery for the EU economy in February. The sentiment numbers point to a decline in consumer and industrial confidence. A European Commission statement said weak order books and lower production expectations were behind the industrial drop.

Consumer optimism about "the general economic situation" deteriorated in all EU states bar three - the Republic, Italy and Austria.

The confidence of Irish consumers was also evident in domestic demand for credit in January, with the latest data from the Central Bank of Ireland showing strong growth in mortgages and other forms of credit.

The monthly lending statistics show annual private-sector credit growth rose from 15 per cent in December to 16.1 per cent in January. While mortgage lending made the largest contribution to the overall rise, the Bank said annual growth in non-mortgage credit had surged from 9 per cent at end 2002 to 10.6 per cent in January.

Annual mortgage growth, at 23.2 per cent, is at its strongest for two years. Data show residential mortgage lending expanded by €476 million in January.

Mr Alan McQuaid, chief economist with Bloxham Stockbrokers, said it was clear Irish consumers had remained positive, despite prevailing uncertainties about the economy.

He dismissed suggestions that the strong credit growth could lead to future repayment difficulties by stressing the Irish savings ratio, which he said remained high.

Mr McQuaid expects the ECB to deliver a rate cut of up to 50 basis points when it meets next week. Such a move would further underpin the affordability of consumer loans in the Republic.

 - (Additional reporting Reuters)