Further ECB rate cuts ‘unlikely’

EUROPEAN Central Bank (ECB) council member Ernst Welteke said yesterday that the prospects for economic growth in the 12 nations sharing the euro had improved and that there was “no reason” to discuss changes in interest rates.

The outlook for growth “is rather on the better side,” Mr Welteke, who is head of Germany’s Bundesbank, said in a televised interview with Bloomberg News.

“The chances are bigger than the risks. The region’s $8 trillion economy may grow about 2% in 2004.”

Evidence is mounting that the euro economy will resume growth in the third quarter after contracting in the three months through June.

German investor confidence has gained for a ninth month in September, the ZEW Centre for European Economic Research said yesterday. Business confidence in Italy in August also rose the most in almost two decades in August.

“We should have reached potential growth in mid-2004 and that then means also an average for the year of about 2%,” Mr Welteke said.

“The outlook for inflation is balanced at the moment,” he added.

The ECB this month raised its forecast for average inflation in 2004 to 1.6% from an earlier estimate of 1.3%, according to an expert close to the central bank.

Mr Welteke reiterated the bank’s projection that inflation would reach 2% this year and be “clearly under” that level in 2004. The ECB aims to keep the rate below 2%.

The ECB has pared interest rates three times between December and June, to 2%, the lowest in more than half a century for any euro member.

Mr Welteke said no further rate moves were on the agenda.

“At the moment there is no reason to seriously think about or discuss interest rate changes,” he said.

Interest rate futures contracts show that investors expect the bank to raise rates by the middle of next year.

The yield on the three- month June Euribor was at 2.37% at 3:13pm in Frankfurt

The current three-month lending rate is 2.15%. One basis point is 0.01 percentage point.

Mr Weltke said that given swelling budget deficits and the prospects of economic recovery it was “ no wonder that the markets expects higher interest rates.”

Germany and France have both said their budget deficits would exceed the EU ceiling of 3% of gross domestic product for a second year this year and may do so again in 2004.

ECB council member Nout Wellink said yesterday that the growing shortfalls may saddle the region with higher interest rates.