Commission warns on need for prudence

The continued rise in the Republic's inflation rate reflects the structural overheating problems warned repeatedly of by the European Commission, a spokesman for the Commission said yesterday.

Responding to journalists' questions on the latest inflation figures, Mr Gerassimos Thomas, spokesman for the Economic Affairs Commissioner, Mr Pedro Solbes, reiterated the Commission view that they showed the need for great prudence and the use of fiscal and economic means to dampen demand.

But he refused to accept suggestions that the Government had disregarded Commission advice. "It is premature to say they are ignoring advice," he said, arguing that changes in policy might be seen in the State's updated Stability Programme this autumn "at which stage we will be able to pass judgment". Mr Thomas said that the rise in inflation figures expected throughout Europe this month reflected the continuing effect of oil prices and that it would be wrong to base a new policy on a single month's figures. Performance in April and May had, on the other hand, been better than expected, he said.

He said that the meeting of the euro-group on Sunday had made clear the continued need for accelerated structural reforms and that pro-cyclical stimulation of the economy in this period of growth "could be very damaging. "So tax cuts must be done in parallel with expenditure cuts," he insisted. There was also an urgent need to speed up liberalisation of industries like telecommunications which could have an important effect on inflation.

Another ingredient in the inflationary pressure on the Irish economy has been the depressed value of the euro and yesterday its management by the European Central Bank was implicitly criticised by the Organisation for Economic Co-operation and Development. "Occasional financial market confusion about policy signals from the ECB did not contribute to a strong euro," a regular OECD report on financial market trends argued.

One of the ECB's main tools is a monthly press conference, a gruelling affair in which its president, Mr Wim Duisenberg, answers a barrage of questions in an event which is scrutinised live in dealing rooms around the world.

Dealers complain that Mr Duisenberg has once or twice appeared to contradict the sentiment of the written statement from the ECB's governing council, which sets interest rates and is issued at the start of each press conference. The ECB insists that the press conference is an important element of its policy of transparency.

The OECD said that massive flows of capital away from the common currency zone had also dogged its currency. "Large investment flows out of the zone . . . were among the factors standing in the way of a more pronounced strengthening (in the level of the euro)," the report said.

It noted that foreigners had bought $141 billion (€151 billion) of US stocks and bonds during the first quarter of 2000.