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05/28 12:29

ECB's Duisenberg Calls Interest Rates `Appropriate' (Update2)

By Rainer Buergin

Brussels, May 28 (Bloomberg) -- European Central Bank President Wim Duisenberg said interest rate levels in the dozen countries that share the euro are now ``appropriate.''

``The current stance on monetary policy is appropriate to ensure the euro-area will maintain price stability over the medium- term,'' Duisenberg said in opening remarks to a committee of the European Parliament.

The bank lowered its benchmark interest rate a quarter-point to 4.5 percent on May 10. That was the first in two years and followed four reductions by the U.S. Federal Reserve and cuts by the Bank of Japan to spur economic growth.

The Fed has since trimmed rates a fifth time. With inflation accelerating, European policy makers may find it hard to justify lowering rates again, even as they expect growth to slow to about 2.5 percent this year, from 3.4 percent last year.

Consumer price increases in the nations sharing the currency have exceeded the ECB's goal of 2 percent for 11 months. The inflation rate rose to 2.9 percent in April, matching the November rate, the highest since the euro's 1999 debut.

When the ECB cut rates, the bank said the inflation rate will probably decline to less than 2 percent by next year.

``The improvement in the medium-term outlook will be overshadowed for some more months to come by short-term developments,'' Duisenberg said. ``The effects of factors causing inflation to be over 2 percent should gradually diminish.''

Growth, Inflation

Duisenberg said the ECB will ``monitor very closely'' pressure on prices from past increases in the price of oil and food costs. ``The maintenance of robust non-inflationary growth is a challenge,'' he said.

Germany and France both grew slower than expected in the first quarter, figures released on May 23 showed. The two account for more than half of the economy of the region.

On the same day, Germany said preliminary figures showed consumer prices rose 3.5 percent in May. French prices rose in April at the fastest pace in seven months, another report showed.

``The ECB is not going to move in the weeks to come,'' said Frank Claus, senior fixed income strategist at Standard & Poor's MMS in London. ``The inflation outlook is still being overshadowed'' by price rises, he said.

German import prices rose 0.5 percent in April from March and gained 5.1 percent from a year earlier, the Federal Statistics Office said today. Economists expected an increase of 0.3 percent from March.

Money Supply

The central bank justified the decision to pare interest rates by pointing to errors in its money supply growth figures, the gauge for future inflation. Duisenberg said the bank's figures probably overstated growth in the M3 measure of money supply to ``the order of 1 percentage point.''

The remarks are similar to the text of the ECB's monthly report for May, which was released on May 17. The report said growth was at least a half-point lower than previous estimates and there may be additional errors of ``similar size.''

Three-month average growth for M3 was 4.8 percent in March, according to the most recent figures, published on April 30. The ECB is expected to release figures for April this week.

The ECB has said that money supply growth of more than 4.5 percent will fuel inflation. The errors would mean corrected M3 growth is below 4 percent.

``Once we see headline inflation coming down, the ECB should continue easing monetary policy,'' said Claus at S&P. Even so, ``that's not going to happen before July,'' he said.

The implied yield on the Euribor futures contract maturing in September fell 4.5 basis points to 4.27 percent. The yield was 4.31 percent before Duisenberg began his testimony.

Communications

To be sure, the ECB has surprised investors in the past.

All but one of the 38 economists and investors surveyed by Bloomberg News before the May 10 meeting expected the bank to keep the rate at 4.75 percent. And a week before the cut, ECB Vice President Christian Noyer said rates wouldn't be lowered.

``We still expect the ECB to cut interest rates by 50 basis points,'' said Stephane Deo, European Economist at UBS Warburg in Paris, after hearing Duisenberg's opening remarks. ``We expect two cuts of 25 points -- the first at the end of July and the second probably in September.''

Asked during his testimony today whether the bank will review its communications, Duisenberg said: ``We are constantly doing that. We don't maintain that we have the best possible communication policy already.''

The bank has no plans to publish minutes of its meetings, ``but we do want to be as open and transparent as possible.'' He didn't elaborate.

-- (M@rket.trends), May 28, 2001

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http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=005KNK

Germany slides towards a recession

-- (M@rket.trends), May 28, 2001.

http://www.guardian.co.uk/business/story/0,3604,497877,00.html

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ECB defends U-turn

Inflation no longer a risk to Europe, says Duisenberg

Special report: economic and monetary union

Richard Adams and Andrew Osborn in Brussels

Tuesday May 29, 2001

The Guardian

The European Central Bank's president attempted yesterday to disarm critics of its abrupt change in monetary policy earlier this month, saying the bank now saw no risk of an upsurge in European inflation. Wim Duisenberg, the ECB's president, told the European Parliament's economic and monetary affairs committee that the approaching global slowdown and weaker inflation outlook had combined to convince the bank to reverse its stance and cut interest rates on May 10.

"We are convinced that ... monetary developments as we see them now certainly no longer pose a risk to price stability over the medium term," Mr Duisenberg said to MEPs in Brussels.

"The global outlook for growth in 2001 has deteriorated over the past few months and has continued to be characterised by substantial uncertainty, especially with respect to the outlook for the US and Japanese economies."

The ECB now expects economic growth within the single currency zone to be around the upper level of the EU's long-term trend, of around 2.5% this year.

Mr Duisenberg had little to say on the euro's exchange rate, after the single currency had endured another rocky week.

Asked about the bank's policy on directly intervening in the currency markets to prop up the euro, he said intervention was a tool the ECB could use, but joked: "I will fully inform you after the event."

But he reiterated that any decision to allow the UK to join the single currency would be "purely political", and would be made by the Euro pean Council, not the ECB. Describing the bank as "a young institution", Mr Duisenberg again defended it against accusations of erratic decision-making, saying the ECB had not intended to catch financial markets unawares with its unheralded change in policy.

"We would like to prepare markets rather than surprise them," Mr Duisenberg said. "But it is a fact of life that that is not always possible."

The ECB came in for heavy criticism after the cut in its lending rate, by a quarter of a percentage point to 4.5%, following the president's well-publicised remark back in April: "I hear but I do not listen."

His comments, and other statements by members of the bank's council, provoked accusations that the ECB was unable to send clear signals to the financial markets.

Mr Duisenberg conceded that the ECB's relations with its domestic markets could be improved. "We are constantly analysing and evaluating our communications policy," he said.

"We don't maintain we already have the best communications policy, as a young institution. But the policy is under constant review and under constant discussion."

The European Parliament also received a report yesterday warning of the high stakes surrounding the introduction of euro notes and coins in place of national currencies in January next year.

A bungled launch could badly damage the credibility of the EU, according to the report's author, Liberal MEP Jules Maaten.

"Successfully managed, the operation should make all Europeans proud. Should problems occur, it might expose the entire European project to criticism," the report said.

-- (M@rket.trends), May 28, 2001.