Irish inflation to move downward

While economists said there was no sign of deflation, dis-inflation in Europe has been so pronounced recently that some economists have begun to call for lower rates.

The drops in consumer prices may supply ammunition to political critics of the Bundesbank and other European central banks that have refused to cut rates.

Ireland's inflation will fall rapidly to German levels during next year, Mr Wim Duisenberg, the president of the European Central Bank has predicted.

Speaking after a talk to the Institute of European Affairs in Dublin yesterday, Mr Duisenberg insisted that inflation will come down across the EU as a result of monetary union.

He also repeated that he does not feel under any pressure from politicians to take their views into account.

"I do not feel under pressure at all. The calls from politicians and others are quite normal and nothing can undermine the independent decision making process of the ECB. But we will take note to the extent we deem it responsible to do so."

Mr Duisenberg's views on the independence of the ECB were also roundly defended by the Minister for Finance, Mr McCreevy. He pointed out that the bank's independence is explicitly guaranteed by the EU Treaty. And in contrast to German finance minister, Mr Oskar Lafontaine, and indeed the Irish Congress of Trade Unions, Mr McCreevy insisted that the ECB need not take any instruction from any other body.

The ECB president was also firmly resisting any pressure for a renegotiation of the tight terms and conditions surrounding monetary union. Pointing out that the terms of the Maastricht Treaty could not be changed, Mr Duisenberg did admit that the Stability and Growth Pact is open to political change. But that was not likely and would be strenuously opposed by the ECB Council, he said.

The Minister also defended the Pact, agreed in Dublin in 1996, and now under pressure from the centre-left governments across Europe. According to Mr McCreevy, it should not be amended or diluted in any way.

And despite pressure from many politicians and trade unions across Europe as well as calls from the assistant general secretary of ICTU, Ms Patricia O'Donovan, yesterday, Mr Duisenberg insisted that the ECB will only talk with the social partners in a EU wide context and not in individual member states, and even then only when it deems the matter to be significant.

He absolutely refused to talk about which direction or by what amount the next move in interest rates would be.

Mr Duisenberg, who spent four years as the junior economist with responsibility for Ireland at the International Monetary Fund in the 1960s, said he would not be putting "very much" pressure on Mr McCreevy to deliver a tight Budget. However, he added that the circumstances in Ireland called for a different monetary, or interest rate, policy to other areas and that the adjustment will have to come in other areas, including fiscal or taxation policy.

"That puts a heavy responsibility on the Minister and I am sure he is aware of it and will act accordingly," Mr Duisenberg said.

He also claimed that the ECB will be "very, very reluctant" to comment on events in individual members states unless they were to have a detrimental impact on the central bank's main objectives. But even given Ireland's small size we could not consider ourselves immune, he said.

Mr McCreevy insisted that the upcoming Budget will be focused on keeping inflation down and repaying debt, while tax cuts will be targeted at lower and middle income groups.

And - in advance of the publication of the Book of Estimates of government expenditure today - he added that wage moderation must be delivered if social partnership is to continue.

Mr Dusienberg was also fairly sanguine about the global economic crisis. While the turbulence in Asia and Latin America had not left Europe immune the signs of a tapering off in growth are "very, very little indeed".

Before the crisis the ECB had been expecting growth of about 3 per cent across the euro countries and that was now expected to be 2.6 per cent or 2.7 per cent. At the same time, he said inflation is expected to be between 1.2 per cent and 1.4 per cent in 1999. On exchange rates, he insisted that this remained in the competence of the national governments but nonetheless he would want a stable euro dollar exchange rate.

And, in a sign that is likely to be welcomed by economists, Mr Duisenberg stressed the importance the medium term, saying the Bank would not be reacting to short term shocks. That would mean it would not cut interest rates if there was another oil price shock for example, he said.

But in one area he did disagree with Mr McCreevy. He said he regretted that the ECB will not be involved in banking supervision as supervisory issues transcend national borders and in many case ought to be in the control of central banks.

That function may be taken away from the Irish Central Bank as part of plans to establish a new financial regulatory authority.

France and Germany announced flat or declining consumer prices yesterday, renewing debate among economists about whether interest rates in Europe are too high.

Official figures released yesterday showed a month-on-month decline of 0.2 per cent in German consumer prices in October, bringing the year-on-year rise to a slim 0.7 per cent. In France, the provisional month-on-month rate in October stood between zero and a 0.1 per cent drop.

While economists said there was no sign of deflation, dis-inflation in Europe has been so pronounced recently that some economists have begun to call for lower rates.

The drops in consumer prices may supply ammunition to mostly left-leaning political critics of the German Bundesbank and other European central banks that have refused to cut rates.