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Surprise ECB Cut


The European Central Bank's shock interest rate cut on Thursday should lighten the U.S. Federal Reserve's load in battling a global economic downturn, but is unlikely to alter the downward arc of U.S. rates, analysts said.

n an abrupt shift, the ECB reduced its key lending rate to 4.50 percent from 4.75 percent, becoming the world's last major monetary power to cut rates this year and scrapping weeks of insistence that inflation risks forestalled an easier policy.

The ECB said evidence that euro zone money supply growth was much weaker than earlier thought had assuaged some of its concerns over inflation.

But analysts said the ECB was using inflation as a fig leaf for the belated recognition that torpid U.S. and Japanese growth was hurting a hitherto resilient Europe, and that the world faced some risk of synchronized weakness or recession.

European central bankers had bristled in recent weeks at calls from officials in the United States, the International Monetary Fund and other industrialized nations that the ECB shoulder some of the burden of averting a global slump.

"This is a very significant shift. Now the ECB is on board ship with other central banks who are combating not only their own domestic difficulties, but also the weakening world economy," said Allen Sinai, chief economist at Decision Economics.

The Fed has slashed U.S. rates by two full percentage points this year, saying overseas weakness could exacerbate an industrial slump amid weak business spending and consumer confidence.

The Bank of England also cut its benchmark interest rate by a quarter point to 5.25 percent on Thursday, its third cut of the year. Japan, Canada, Switzerland, Australia, New Zealand, Denmark and Korea have all lowered borrowing costs in 2001.

"The global cyclical outlook has not been this bleak for over 20 years. The ECB is waking up," said Anirvan Banerji, director of research at the Economic Cycle Research Institute in New York, which tracks business cycles around the world.

Both Banerji and Sinai have warned that a simultaneous slump in major industrial centers could leave the world without a central locomotive to power a global recovery.

"Without the ECB moving, it was making the Fed's job harder," Banerji said. "The Fed knew we risked facing an international recession. They knew there was a risk of recession in Germany and Europe even though the ECB didn't."