Fed Rate Cut Puts Pressure on Europe to Follow --- Inflation Deters the ECB, And Nations' Needs Differ; Postponing the Inevitable?
FRANKFURT -- The Federal Reserve's hefty interest-rate cut adds to the mounting pressure on the European Central Bank to follow suit today to boost the flagging euro-zone economy, but stubbornly high inflation and national politics are putting the world's No. 2 central bank in a bind.</br></br>Inflation isn't falling significantly despite the slowdown, and remains above the ECB's target of 2%. In addition, inflation rates among the 12 nations in the euro zone are diverging. This makes a one-size-fits-all monetary policy more difficult to practice and pits the interests of small, higher-inflation countries against those of the large nations that would likely benefit from lower rates.</br></br>At today's meeting, the ECB will weigh whether the bad news on the economy warrants a shift in focus from fighting inflation to supporting growth, a move that could by extension aid the U.S. and global economy. Over the past month, further evidence of a halting recovery has continued to pour in. Just yesterday, Germany reported that orders to its manufacturing industry fell a monthly 2.5% in September, dimming the prospects of Europe's largest economy. And in France, the region's second-largest powerhouse, industrial demand fell in the third quarter of this year, and a survey showed that business executives expect a further drop in the fourth. The Fed's decision also underscores the weakness of the U.S. economy, which Europe traditionally counts on to pull it out of a slump.</br></br>Already this year, the ECB did an about-face on its attitude toward inflation. During the summer, the bank was gearing up to raise borrowing costs but had to quickly retract that plan as the recovery and stock markets faltered. Still, during the past few days, public statements from ECB officials suggested the 18-member governing council hadn't yet reached an agreement to cut rates as early as today. The ECB has surprised markets before, however.</br></br>Some economists believe that if the ECB holds rates steady today, it will simply postpone the inevitable, miss a chance to appear proactive, and come under fire from the politicians, banks and media. "What do they win or lose by waiting another four weeks?" said Julian von Landesberger, an economist with HVB Group in Munich. "Until now the ECB was much too optimistic with regard to growth next year."