Ifo index of German business optimism falls, could mean more pressure on ECB to cut rates

FRANKFURT – A key measure of German business optimism fell in April, suggesting Europe’s biggest economy might not be rebounding as expected and likely putting more pressure on the European Central Bank to cut interest rates.

The Ifo institute said Wednesday that its index fell to 104.4 points from 106.7 in March. Market analysts had expected a more modest decline to 106.2.

Germany has been one of the more resilient economies in the 17-country eurozone in recent years. A slowdown in its economy, which accounts for 28 per cent of the currency bloc’s total output, would make it harder for the region to climb out of recession.

The German economy shrank 0.6 per cent in the last three months of 2012. Most economists expected it to grow this year, but those predictions have been shaken this week by a weak survey of activity in the manufacturing sector.

The chief of the Ifo’s survey, Kai Carstensen, said the index remained at a high level but showed increased doubts about the future. “The German economy is taking a breather.”

That could make officials at the ECB more inclined to cut interest rates to support growth.

“Resistance to a rate cut will be crumbling,” Christian Schulz, an analyst at Berenberg Bank in London.

The ECB’s 23-member governing council has discussed cutting rates, but held off because officials think another cut from the record low of 0.75 per cent would do little good. Rates are already low but the cheap financing is not reaching many companies because troubled banks in some parts of the eurozone are reluctant to lend.

Analysts say a rate cut might do little to spur lending but could lower the euro’s exchange rate, which would help exporters. Lower rates make interest-bearing investments in euros less attractive and reduce investor demand for the currency.