Central bank chiefs defend their autonomy

The Bundesbank is willing to support moves to lower interest rates next year, but for the moment its top job is helping European rates converge before the start of monetary union, council members indicated yesterday. Meanwhile, the independence of the new European Central Bank (ECB) has been defended by its chief economist, Mr Otmar Issing and the Bank of France governor, Mr Jean-Claude Trichet.

Speaking across Germany following the German central bank's council meeting on Thursday, several members of the Bundesbank's policy-making council made clear they felt compelled to help short-term European rates converge by January 1st.

With Germany's 3.3 per cent securities repurchase rate widely seen as the rate others must match, that means maintaining stable rates for the rest of the year.

"The Bundesbank was given the task of ensuring a smooth introduction of the euro. The interest rate convergence, which is required on January 1st, has by far not been reached yet," council member Mr Klaus-Dieter Kueh bacher said yesterday. "In this context to change the course right now is for us almost impossible," he said.

Fellow council member Mr Ernst Welteke also said European considerations took priority for the moment.

Once the common interest rate level is achieved, the door may be open next year for the European Central Bank to push rates down in the 11 nation euro zone, council members suggested.

Analysts believe that, with inflation low and recent economic indicators suggesting the Asian financial crisis may hurt European economies, there is a good argument for an easing.

Speaking late on Thursday night, Bundesbank president Mr Hans Tietmeyer said Europe was not blind to the scope which could exist for interest rate cuts.

However, senior European central bankers continue to insist that monetary policy must operate independently of political pressure. Mr Trichet said yesterday that the French central bank would not submit to any external influence when setting interest rates between now and the end of the year.

"We will not be influenced one way or the other at our meetings between now and the end of the year," Mr Trichet said in a speech to the European Mortgage Federation in Brussels.

Mr Trichet said the bank would base its decisions on all available economic and other data, while taking into account the objective of smooth convergence of shortterm interest rates within the euro zone "towards interest rates at the lowest level".

A debate has raged over central bank independence following calls by Germany's new Finance Minister, Mr Oskar Lafontaine for lower interest rates in Europe.

Mr Trichet said independence was an essential factor which had ensured confidence in the euro and brought long-term interest rates in Europe to their lowest ever levels.

Meanwhile, Mr Issing said political pressure exerted on the ECB would not sway its policy and could prove counterproductive.