Warning on ECB interest rates

Any further rise in European Central Bank (ECB) interest rates should be undertaken with caution, the European Parliament was told yesterday. In his comment on the ECB's 2006 annual report, Fine Gael MEP Gay Mitchell said interest rates policy should not endanger economic growth.

The report, adopted unanimously by the European Parliament's Economic and Monetary Affairs Committee, says economic recovery in the euro zone has become a self-sustaining process, with domestic demand being the main driver.

Parliamentarians have also echoed calls by French president Nicolas Sarkozy to revisit how foreign exchange rate policy is managed in the euro zone, on the same day that the euro hit record highs.

Mr Sarkozy had suggested the ECB pursue efforts to put in place a foreign exchange rate policy.

However, in a sharp rebuttal to Mr Sarkozy, ECB president Jean-Claude Trichet said yesterday that a euro-zone policy on foreign exchange rates that ran counter to the Group of Seven position "won't work".

Testifying before the parliament, Mr Trichet said currency issues should be managed within the Group of Seven. "It is not to say the situation is easy. It is not to say that the situation is very nice," he said. "But I would say then let's be as responsible as possible in the present circumstances."

Earlier, Mr Mitchell reiterated his concerns on property prices, and called for the euro zone to devise a system similar to the US Federal Reserve formula to help independently forecast the likely effect of interest rate increases on house prices.

The Fed formula shows that, where interest rates rise after a prolonged period where house prices have been climbing strongly due to low interest rates, prices begin to decline 18 months to two years later. ECB interest rates began to increase in 2005.

Mr Mitchell said prices in Ireland dropped by 2.1 per cent from January to May this year, despite some estate agents estimating that they would increase by between 8 and 10 per cent.

He asked the ECB to examine subprime lending after some problems were taking a serious toll in the US market. Mr Mitchell also suggested the ECB needed to examine the reasons for the increase of 13.2 per cent in the number of €500 notes in circulation, amid fears their use could be linked to criminal activity.