ECB, Bank of England May Follow U.S. Fed Cut, Economists Say

ECB, Bank of England May Follow U.S. Fed Cut, Economists Say

Jan. 22 (Bloomberg) -- The European Central Bank and the Bank of England may have to follow the Federal Reserve and slash interest rates as the risk of a U.S. recession threatens to drag down a global expansion, economists said.

``From a European and a U.K. perspective, the Fed cut adds to the risk of more and quicker rate cuts,'' said Amit Kara, an economist at UBS AG in London. Kara predicts four cuts from the Bank of England this year and two by the ECB.

The Fed today lowered its benchmark rate in an emergency move for the first time since 2001 after stock markets tumbled from Hong Kong to London amid signs the world's largest economy is sliding into recession. The move spurred a rally in European stocks, though failed to stem a decline in U.S. indexes.

The widening interest rate gap between the U.S. and Europe may spur gains in the euro, worsening the outlook for an economy already showing signs of a slowdown by crimping exports. German investor confidence dropped to the lowest since 1992 in January, European manufacturing growth slowed in December and U.K. house prices are falling.

``This market has been calling for help,'' said Alberto Espelosin, who helps manage about $12 billion at Zaragoza, Spain-based Ibercaja Gestion. ``The ECB should follow suit.''

Investors are increasing bets the central banks will cut borrowing costs, interest-rate futures trading shows.

The yield on the June ECB contract fell to 3.80 percent today from yesterday's close of 3.94 percent. On the June U.K. contract, the yield fell 3 basis points to 4.89 percent.

Euro Gains

The ECB and the U.K. central bank refused to give away their intentions. The Bank of England said it has no plans to bring forward next week's meeting of the Monetary Policy Committee. ECB council member Juergen Stark, speaking in Brussels, declined to comment on the Fed's decision.

The euro, which touched a record $1.4967 on Jan. 23, rose 0.8 percent to $1.4541 at 4 p.m. Frankfurt time after the Fed's announcement. The pound climbed 0.5 percent to $1.9522.

``If it becomes clear that this is merely a temporary fix, and the situation deteriorates further, then the ECB will be forced to act,'' said Ken Wattret, an economist at BNP Paribas SA in London.

Some economists cautioned the ECB and the Bank of England against a knee-jerk reaction.

The Bank of England ``can justify a cut in the near term,'' former policy maker Richard Lambert, who now leads the Confederation of British Industry, said today before the Fed announcement. ``I can't see steep cuts,'' which would be ``taking risks with inflation'' and ``would not be good for credibility,'' he said. The bank's rate is now 5.5 percent.

Strong Enough

The European economy is still strong enough to cope with the current 4 percent rate, said Holger Schmieding of Bank of America Corp.'s chief European economist.

``Economic data would have to be much, much weaker to trigger a rate cut of the ECB,'' said Schmieding, who is based in London.

Investors should nevertheless by wary that the ECB is capable of surprising the market.

``In a meltdown scenario, the ECB can convene a conference call for the Governing Council and announce a rate cut at any time,'' said Wattret. ``We don't expect a repeat at this point in time, but market developments and the impact on the real economy will be pivotal.''

BLOOMBERG