Duisenberg says rate cut will not dispel uncertainty

 

European Central Bank president Mr Wim Duisenberg appeared to rule out further interest rates cuts when he said yesterday that a further rate reduction would not drive away the uncertainty shrouding Europe's economy.

"A further loosening of monetary policy can hardly drive away the uncertainty which has burdened the economy for the past months," he said in an interview released yesterday.

"To create new trust with consumers and companies one needs much more than a further reduction of interest rates," Mr Duisenberg told the German newspaper, the Frankfurter Allgemeine Zeitung.

His comments are in line with those he made publicly on Saturday in Washington, signalling little likelihood of a rate cut for now despite an apparent end in sight to the war in Iraq.

"The (ECB) governing council considers the present policy stance as consistent with the preservation of price stability over the medium term," he told a press conference following a meeting of Group of Seven financial leaders in Washington.

He had said the same thing when the bank left interest rates at 2.5 percent on April 3rd and markets now wonder whether a rate cut will be delayed until June, or not happen at all.

Pressure for an ECB rate cut is high, with the International Monetary Fund urging action if a euro zone recovery fails to kick in, and G7 partners like the United States urging that other countries play their part in lifting the world economy - code for more ECB rate cuts.

But Mr Duisenberg said that it was the lack of confidence and high uncertainty which were obstructing recovery, not borrowing costs, which are at their lowest levels since the second World War.

This meant that interest rates "in no way inhibit the resumption of economic growth and prosperity," he said.

Instead, the main challenge for the G7 was to restore this confidence and tap the pent-up demand from businesses and households. And this meant that both fiscal and monetary policy must remain anchored in medium term objectives of stability.

"I would like to stress, as I said in the meeting, that it is of paramount importance that all policies maintain a medium term orientation, especially at times of high economic and geopolitical uncertainty, in order to create an environment that enhances confidence of both consumers and investors," he said.

This was aimed at euro zone members who want to loosen the region's strict budget rules in the Stability and Growth Pact. But he and Mr Nikos Christodoulakis, current chairman of the euro group of finance ministers, both said this must not happen. - (Reuters)