A few months ago, the prospect of lower interest rates from the European Central Bank would not have been welcomed here. The economy was booming and higher - not lower - interest rates appeared the appropriate medicine. Now, however, the outlook has changed. The US slowdown is having an impact here and - combined with the effect of the foot and mouth outbreak - will act as a brake on economic growth this year. Suddenly the prospect of lower euro zone interest rates is more attractive.
The European Central Bank meets on Thursday and a rate reduction is a strong possibility. The ECB will be conscious of the impact of the US slowdown on Europe. Some recent indicators have suggested that the main euro zone economies may also be slowing and the ECB will be keen that, as the US slows, growth in the EU remains reasonably robust. So lower interest rates look certain over the coming weeks; the only question surrounds the timing of the move.
The financial markets are certainly hoping for an interest rate cut this week. Encouraged by this prospect, the main EU markets rose strongly yesterday, anticipating that this Thursday might see the first reduction in euro interest rates in a new downward cycle, following the sharp reductions in US interest rates seen since the start of the year. If the ECB does not deliver, of course, the risk is that these gains will be quickly wiped out.
Lower interest rates would be a welcome lift to confidence in the Irish economy. The technology sector has been seriously hit by the international downturn. Even yesterday announcements from a number of companies highlighted the difficulties this is causing in the internet sector here. Unfortunately, there are no signs that the technology sector will quickly revive. Meanwhile the foot and mouth situation is affecting farming, the agri-business sector and the wider economy.
It is difficult to calculate the combined impact of these two factors on the outlook for economic growth. Economists have revised their growth forecasts for 2001 downwards to 5 to 7 per cent. However they will concede that serious uncertainties are now affecting the outlook. How far will foot and mouth spread and how long will it linger here and in Britain? Is the US technology sector close to reaching its low point or has it further to fall? On these issues hang the prospects for growth here over the next year and more.
Against this backdrop, some fall in interest rates would be welcome. It would give a lift to consumer confidence and be of some assistance to business. As inflationary pressures are easing a little and growth is slowing, the risk of lower rates pushing up prices further is less than it would have been a few months ago. However it is important to realise that lower borrowing costs are no panacea, as has been shown in the US where despite successive reductions, the outlook for growth remains uncertain. Reduced interest rates would help, however, and given the threats to the international economic outlook it would seem appropriate for the ECB to move this week.