Interest rates set to be at lower level when euro begins

The president of the European Central Bank (ECB), Mr Wim Duisenberg, has indicated that when the euro is launched next January, interest rates will be at the lower end of the European spectrum. Speaking after a meeting of the bank's governing council, Mr Duisengberg expressed satisfaction at Europe's low level of inflation, which he expects to remain stable for the foreseeable future. "An important external factor underlying the favourable prospects for inflation is the sharp decline in oil and commodity prices, which is partly associated with developments in Asia.

"Moreover, domestic sources of inflation, such as those arising from the labour market situation and capacity utilisation, are also relatively moderate at the present juncture. In my opinion, taking a euro area wide perspective, these views are also broadly compatible with current monetary and financial developments," he said.

Lack of pressure from inflation would leave the ECB free to set a low interest rate, possibly close to the current German repurchase rate - the Bundesbank's key wholesale money market rate of 3.30 per cent. The ECB has no power to oblige countries with higher rates, including Ireland, to cut rates gradually to this level in the weeks ahead, but Mr Duisengberg held open the possibility that rates in some countries could fall dramatically as the euro launch approaches. The council discussed the financial crisis in Russia and Asia and Mr Duisengberg acknowledged that worsening global conditions could affect the euro area. But the impact could be limited by the fact that most of the crisis regions are relatively small in economic terms, with limited trade links to the euro area.

"We are perfectly aware that the risks associated with current global developments go beyond those effects which we can measure directly. In this respect, one may think of indirect influences resulting from changes in confidence, saving and expenditure within the euro area. We have to take these risks seriously and analyse the situation soberly. But we should not dramatise." he said. Once the euro is launched, the council will meet every fortnight and Mr Duisengberg said he would hold a press conference each month. Yesterday's meeting finalised such details as the design of euro notes, agreeing that they would have no national features.

But the emphasis was on Europe's economic performance, which Mr Duisengberg predicted would remain in line with earlier optimistic forecasts.

"Domestic demand remains strong while the contribution to growth from net exports has declined. Both private consumption and investment provided an important stimulus to the growth rate in the first quarter of this year.

"More up-to-date indicators point towards continued expansion in the second quarter, albeit at a possibly more moderate pace than in the first quarter," he said.

Europe's central bankers are eager to deliver an up-beat message, calculating that the biggest threat to Europe's economy could be a global loss of confidence. Mr Duisengberg summed up the message like this: "Don't panic, but continue on your stability-oriented policy."