Conflicting ECB projections

TOP European Central Bank figures clashed yesterday over the future direction of ECB interest rate policy.

Council members Ernst Welteke and Yves Mersch gave conflicting signals in separate interviews to the press about the current ECB stance on interest rate policy.

Specifically they addressed the issue of whether slowing inflation would lead the ECB to cut rates again as has been speculated.

Mersch said an inflation rate that would decline below the ECB’s 2% inflation ceiling “is not an argument in itself” to lower rates, while Bundesbank President Welteke said such a fall “opens up room” for even lower borrowing costs.

Over the weekend however ECB president Wim Duisenberg gave a very strong signal that the resolution of the Iraq war had eased the pressure on further cuts in ECB rates.

Irish economists such as Jim Power of Friends First and Alan McQuaid of Bloxham Stockbrokers believe the ECB will be forced to cut rates by up to 0.5% before the year is over.

While expectations of lower borrowing costs in the near future have eased, analysts believe the continuing decline in Euro growth rates will force the ECB to cut rates eventually.

Having cut rates twice since December it pointedly dismissed calls by the European Commission and the International Monetary Fund that it should lower rates further.

The inflation rate in the 12 nations using the euro has exceeded the ECB’s limit for most of the past two and a half years, and that has made the ECB very slow to cut rates even when it was clear the Eurozone economy was in decline.

“The ECB wants to get a clearer picture before it prepares a rate cut,” said Karsten Junius, an economist at Dekabank AG in Frankfurt.

“If we see signs pointing to an economic recovery in the second half, they may not need to cut it at all.” Junius expects no more rate reduction this year.

ECB officials including President Wim Duisenberg and Welteke have said they expect inflation to slow to below 2% in the second half of the year.

The ECB last lowered rates to a three and a half year low of 2.5% in March.