By Anne D. Picker, International Economist, Econoday
Monday, July 14, 2003

Last Week's Highlights
Bank of England acts...
Mervyn King began his term as governor of the Bank of England on July 1. Chairing his first monetary policy committee meeting, he immediately lowered the Bank's key interest rate by 25 basis points to 3.5 percent - the lowest level since January 1955. The Bank has been torn between a boom in consumer debt and rising house prices and gradually deteriorating economic growth. Inflation above their 2.5 percent target didn't seem to come into play this time because of the temporary factors that pushed the rate up - they expect it to unwind in the next few months. But Bank of England watchers will have to wait until the release of the minutes in two weeks for the full explanation of their move. In their accompanying statement, the Bank said that the global economic recovery remained tenuous even though the preconditions for recovery remained in place. The MPC pointed to slowing output growth along with lower consumer demand and subdued private investment. Business leaders were happy with the cut while homeowners also had reason to cheer, as it could lead to cheaper mortgage payments. The economy grew at its slowest pace in 11 years during the first quarter and growth continues to be sluggish.

But the ECB does not
The European Central Bank decided to leave its policymaking interest rate at 2 percent after having lowered it in June by 50 basis points. In his post-meeting press conference, ECB President Wim Duisenberg said monetary policy was fine for the foreseeable future. He also said he was relieved that the appreciation of the euro had paused and not escalated. In essence, he ruled out changes to the monetary strategy of the central bank going beyond those recently announced. He also called for European governments to do their part to boost growth

European governments have been notorious in postponing much needed economic reforms. Belatedly, Germany has embarked on reforms aimed at curbing welfare state excesses. These take a long time to implement and the economy is in dire need of short-term stimulus. But government policy is confined by the need to bring Germany back within the limits of the euro area's stability pact, which requires governments to curb borrowing. GDP barely nudged up 0.1 percent in the first quarter, while other economic indicators are painting a gloomy picture for the whole eurozone economy. In France, strikes are rising to protest proposed changes in pension rules.

The EU Presidency has confirmed that Jean-Claude Trichet will be asked to start his duties as European Central Bank president on November 1. EU ambassadors have approved the start date, and EU finance ministers are set to adopt a recommendation approving Trichet's appointment and start date at their July 15 meeting. Trichet will have to face a hearing before the EU Parliament's Economic and Monetary Affairs Committee on September 11. The ECB Council itself is scheduled to back the nomination before its summer break in August.

The optimism that had buoyed world stock markets at the start of the week fizzled out as the week progressed. Nerves were stretched thin while waiting for earnings reports. And even the soaring Nikkei sold off late in the week. Share prices have been lifted recently on a wave of hope for a quick recovery in the economy and corporate earnings. But investors have become nervous as concrete evidence continues to be illusive to support their enthusiasm. On the week, two of the indexes followed here (Topix and Bolsa) inched down. The other indexes managed to end the week on the plus side despite mid-week erosion.

Last Week's Highlights   •   Global Stock Market Indexes   •   Recap of Global Markets   •   Currencies   •  Indicator Scoreboard

The Bottom Line   •   Looking Ahead