By Anne D. Picker, International Economist,Econoday
Monday, February 11, 2002

Stock prices were down as investors continued to take earnings statements with a grain of salt. Are the earnings real or is there more skull-duggery afoot? Where doubt turns up, severe punishment for the stocks follows. On the week, all indexes followed here were lower with the exception of the Australian all ordinaries, which inched up 8 points.

Four central banks met last week and all four left their monetary policy on hold. The Reserve Bank of Australia, which reduced rates by two percentage points last year, kept its benchmark interest rate unchanged at 4.25 percent - a 28-year low. With the Australian economy growing at more than a 4 percent annualized rate and inflation above the central bank's target, economists expect the next move in rates to be an increase.

The European Central Bank left its policymaking interest rate unchanged at 3.25 percent as expected. As in the United States, recent economic indicators suggest a less pressing need for further cuts. The ECB is especially cautious prior to key German wage negotiations and has been exhorting the unions to settle for modest non-inflationary increases. The ECB cut rates by 150 basis points last year. The ECB Governing Council, which holds two of its meetings outside Frankfurt each year, met in Maastricht to commemorate the 10th anniversary of the treaty that was the cornerstone to the creation of a single European currency. It was appropriate that ECB chairman Wim Duisenberg took the opportunity to announce his retirement effective on July 9, 2003. As part of getting the job as chairman, he agreed to serve only a portion of his eight year term. With his date of departure settled, focus shifts to the naming of his successor.

The Bank of England left its key interest rate unchanged at 4 percent. That decision also was widely expected despite the dire condition of the manufacturing sector, which has been crumbling under the weight of the relatively high value of the pound sterling.

The Bank of Japan left monetary policy unchanged despite government pressure for the bank to act. The economy is in its third recession in a decade, with the jobless rate at a record, bankruptcies at a 17-year high and prices still extending a 2 1/2-year slide. The BOJ has said that it will inject as much cash as needed into the financial system to prevent bank failures. BOJ policy makers have exhausted conventional policy tools, keeping interest rates near zero since last March and flooding the money market with cash. It is estimated that Japan's 15 biggest banks now have a combined 4.8 trillion yen ($36 billion) in unrealized losses on stock holdings.

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