ECB backs eurozone rates

EUROPEAN Central Bank vice-president Lucas Papademos said yesterday that interest rates in the euro area are ‘appropriate’, even as the price of oil reaches a record and growth sputters.

“The current level of interest rates is appropriate,” Mr Papademos said. Borrowing costs “are exceptionally low and correspondingly provide considerable support for economic activity.”

ECB policy makers have left rates at a six-decade low since June 2003, even as politicians including German Chancellor Gerhard Schroeder call for a cut in borrowing costs to foster growth.

European Union Monetary Affairs Commissioner Joaquin Almunia said over the weekend the European Commission will probably trim its economic growth forecast for this year following a 57% surge in the price of crude over 12 months.

Mr Papademos was speaking following a meeting of finance ministers from the EU and Asia in the Chinese city of Tianjin. The policy makers said after the summit that ‘high and volatile’ oil prices pose a risk to global growth.

Mr Papademos’ comments come a day after fellow ECB board member Gertrude Tumpel-Gugerell said the increase in oil prices is hampering a recovery in the dozen countries that use the euro.

With oil prices at about $60 a barrel and unemployment near a five-year high, the growth outlook for the economies sharing the euro has worsened. The ECB this month reduced its 2005 growth forecast to about 1.4% from 1.6% in March.

European business confidence fell to a 21-month low in May and consumers were the most pessimistic in a year. The euro region’s economy expanded 0.5% in the first quarter from the previous three months, lagging the comparable 0.9% growth rate in the US and 1.3% in Japan.

“It’s clear that high and possibly increasing oil prices will simultaneously have an adverse effect on growth as well as inflation,” said Mr Papademos.

While it is too early to say whether higher costs of raw materials may have knock-on effects for wage claims, he said, “it’s important to ensure that past price increases, as well as future oil price increases, do not lead to second-round effects on wages and prices.”