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Morgan Stanley Says ECB May Cut Rates Next Year as Growth Slows

The European Central Bank may cut interest rates next year amid a “dire” economic outlook, Morgan Stanley economists said after reducing their euro-area growth forecasts.

“Slower growth, falling capacity utilization and rising unemployment will likely put a dampener on underlying inflation in the euro area,” economists including Elga Bartsch wrote in a research note to clients. A “benign inflation outlook would allow the ECB to reverse the course of its monetary action and start to cut interest rates in early 2012 when inflation falls meaningfully below 2 percent.”

At the same time, “the possibility of the ECB raising rates once more in October cannot be completely dismissed yet,” they said. President Jean-Claude Trichet has indicated the bank is still in tightening mode and stressed that interest rates can change independently from liquidity measures, the economists wrote.

Morgan Stanley predicted the ECB will lower its benchmark rate -- currently at 1.5 percent -- to 1 percent by the end of 2012. The economists cut their euro-area growth forecasts to 1.7 percent for this year and 0.5 percent for next year from 2 percent and 1.2 percent respectively.

“While not our base case at this stage, we see a material risk of outright recession,” they said.

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