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ECB Cutting Interest Rates

The European economy also in the news today. The European Central Bank cut interest rates by a 1/4 point as policymakers acknowledge that Europe's economic outlook had worsened. Joining me now to talk about the implications of this rate cut, Lakshman Achuthan. He's Managing Director of the Economic Cycle Research Institute, an economic forecasting firm in New York City. And nice to have you on the program.


GHARIB: Well, you know, the European bankers have been criticized for quite a while for not acting aggressively to cut interest rates and now today, after all these months, they've finally cut by a 1/4 point. Is that going to help the European economy?

ACHUTHAN: Well, eventually. It's a step in the right direction and I think it's an acknowledgement of the situation we're in. We're in the midst of a global synchronized economic downturn that's pretty severe and Europe is included and today's action begins to recognize that inflation is just not the problem.

GHARIB: The European economies, I mean, we're talking Germany, France, Italy, all of them in serious economic trouble, and yet their situation, I guess, different than ours, that their Fed-


GHARIB: -- has to come up with economic solutions for, that one size fits all.

ACHUTHAN: One size fits all. It's very, this is a test, actually, of this in that you can have a one size fits all policy with some of the larger economies like Germany actually contracting in the second quarter. At an annualized rate, you had a -.1 percent growth rate and some of the other smaller countries still growing. So it's difficult to see exactly how a one size fits all policy can work. But here no matter what they need to be stimulating the economy and I think they're taking a step in the right direction.

GHARIB: Well, do you think that this is the beginning of more easings?

ACHUTHAN: With that, the case for easing is very strong. There's no inflation pressures. The future indicators of inflation for Europe are headed directly down, just as they are in the U.S., and the indicators of growth have yet to turn back up. So from a policy point of view, it's clear the direction is down.

GHARIB: Do you think that this rate cut, and if there are future easings, in what way might they help the American businesses and the U.S. economy?

ACHUTHAN: Well, the first thing is in this global synchronized downturn these are tough to kick start up. We've had two in the post war period and they lasted for the U.S. economy 16 months long in 1974 and '81. So the U.S. Fed can't do it all alone. We need easings around the world. This is very, very important that this has begun in Europe.

GHARIB: Do you think that then synchronized economic easings will help the synchronized global slowdown?

ACHUTHAN: Yes, I do. Eventually it will. There are some interesting characteristics to this downturn, particularly the pullback in business spending, which is not as amenable to lower interest rates as, say, a pullback in consumer spending. You know, the lower interest rates in the U.S. have helped bolster the consumer so far this year and that's been a nice surprise.

GHARIB: A real quick question, as we look to see when this whole global economy, the worst will be over, what will you looking at as the key indicator to say it's bottomed?

ACHUTHAN: For the global economy I'd look at the Journal of Commerce-ECRI Industrial Price Index. It's like taking the temperature of the global industrial economy. It's at a very low rate now. You have to see that turn up.

GHARIB: OK. Thank you so much for coming in and talking to us.

ACHUTHAN: Thank you.

GHARIB: My guest tonight, Lakshman Achuthan of the Economic Cycle Research Institute.