Pressure on ECB to cut rates

Written by The Financial Times | Updated: Oct 26 2011, 05:37am hrs
By Ralph Atkins in Frankfurt

Eurozone economic activity has contracted this month at the fastest pace for more than two years, according to a closely watched survey that will increase pressure on the European Central Bank to cut its main interest rate.

The sharper than expected fall in eurozone purchasing mangers indices adds to evidence that the 17-country region is tumbling into recession, with the escalating debt crisis casting an increasingly dark cloud over the regions prospects.

The uncertainty provoked by the sovereign debt crisis has reached danger point, warned Christoph Weil, economist at Commerzbank in Frankfurt.

The main composite index - covering manufacturing and service industries - fell from 49.1 in September to 47.2, the lowest since July 2009, when the region was still recovering from the global slowdown triggered by the collapse of Lehman Brothers investment bank. It was the second month running that the index was below 50, which divides an expansion from a contraction in activity.

With the survey providing an up-to-date guide to growth trends, the latest reading signals a heightened risk of the eurozone sliding back into recession, said Chris Williamson, chief economist at Markit, which produces the survey. Not only the crisis-hit eurozone periphery economies were contracting, he pointed out. French private sector activity also declined in October led by a worryingly steep deterioration in the service sector, as did German manufacturing activity, which had spearheaded the regions recovery.

Peter Vanden Houte, European economist at ING in Brussels, added: The snail-like progress in the resolution of the European debt crisis is unlikely to alter this picture soon.

With the survey also showing inflation pressures had abated significantly, the results strengthened the case for the ECB cutting its main interest rate possibly as early as its meeting next week - the first to be chaired by Mario Draghi, who takes over from Jean-Claude Trichet as ECB president a few days earlier.

A cut in the ECBs main policy interest rate, currently 1.5 per cent, was backed by a large minority on its 23-strong governing council at its meeting in September. But Mr Trichet secured a consensus behind a decision to hold fire and focus attention on providing additional liquidity support to eurozone banks.

The ECB has room for manoeuvre. Earlier this year it broke ranks with the US Federal Reserve and Bank of England and raised its main interest rate twice to head off inflation threats - most recently by a quarter percentage point in July. Since then eurozone inflation has risen further - hitting 3 per cent in September - but is widely expected to fall sharply next year. The ECB aims to keep the annual rate below but close to 2 per cent.

Offsetting some of the gloom, eurozone industrial orders rose by a stronger than expected 1.9 per cent in August, according to separate data from Eurostat, the European Unions statistical unit. That followed a 1.6 per cent fall in July. The series is volatile, however, and did not stop economists predicting a bitter economic winter for the region.

The Financial Times Limited 2011