Rate cuts ‘not way to boost economy’

EUROPEAN Central Bank president Wim Duisenberg said the key to boosting the pace of economic recovery lies in boosting consumer and business confidence, and it is not interest rate cuts that will do this.

“The main problem which plagues both the euro area, and the American economy also, is not the level of interest rates, it’s the lack of confidence and the great deal of uncertainty prevailing in all these economies,” he told the European Parliament economic and monetary affairs committee.

He noted that US Treasury Secretary Paul O’Neill had said that companies take investment decisions based on expectations of the rates of return and on economic confidence, and not based on the level of interest rates.

“Policymakers should re-inspire confidence among consumers and investors,” said Duisenberg.

He said the ECB stability-oriented medium-term stance was the best contribution a central bank can make to boosting confidence, and he said he felt this even more strongly after observing the results of more aggressive rate-cutting policies of some other central banks.

Asked about IMF managing director Horst Koehler’s call for an ECB rate cut, Duisenberg noted that Koehler also regarded rigorous structural reforms as a necessary precondition for any easing move. Duisenberg said he had also asked Koehler to explain his comment that in the context of the current economic environment and the need to stimulate growth, monetary policy is “the first line of defence,” but he said he was still waiting for an answer.

In any case, Duisenberg said eurozone real interest rates were at historically low levels already. Real short-term rates are currently at 1.1-1.5% compared with an average of 4.8% over the 1990-’98 period and 3.4% in the 1980s, while real long-term rates are at 2.3-2.7% compared with 5.3% in the 1990s and 5.1% in the 1980s. Duisenberg said domestic demand, particularly consumer spending, will be the main motor of the economic recovery, and noted some signs that private consumption did recover in the second quarter, albeit at a moderate pace. He said annual growth in loans to the private sector remained above 5%, which is not low by historical standards, indicating that bank financing conditions remain favourable.

And he said the eurozone banking sector remained solid.