Rates at lowest level in euro-zone states since 1945 as Duisenberg hints further cuts may be on the way
The European Central Bank (ECB) has cut interest rates by half a percentage point, taking them to their lowest level in the euro-zone countries since the end of the second World War. Announcing the decision after a meeting of the ECB's governing council in Frankfurt, its president, Mr Wim Duisenberg, suggested that further cuts were possible.
"If the United States has room for manoeuvre with an even lower interest rate than we have, you can conclude that we have not exhausted our room for manoeuvre," he said.
Mr Duisenberg said that the ECB's economic forecast, to be published next week, would scale back expectations for economic growth in the euro zone. He predicted that inflation would remain below but close to 2 per cent for the rest of this year and could fall further in 2004.
He dismissed fears of deflation, however, even if inflation did fall below zero in some parts of the euro zone, such as Germany.
"We are convinced that we don't have to prepare ourselves for deflation because we don't see deflation coming," he said.
Mr Duisenberg acknowledged that the euro's sharp rise against the dollar could hit the profits of European exporters, but he expressed satisfaction with the current exchange rate.
"Evidently, the significant and rapid appreciation of the euro over recent months will dampen external price competitiveness. However, the current level of the euro's real effective exchange rate, and thereby the competitive position of euro area exporters, is very close to longer-term averages. Thus, when put into perspective, current euro exchange rate levels are in line with economic fundamentals and with our interest in a strong and stable euro," he said.
Mr Duisenberg said that there was a "high level" of agreement within the governing council on the timing and the extent of yesterday's rate cut but he acknowledged that the meeting had discussed the merits of making a bigger or a smaller cut.
He stressed that, at 2 per cent, interest rates were at an historic low but declined to rule out further cuts later this year.
"I have no expectations. I have no bias: We will monitor the situation and act appropriately when the time is ripe," he said.
Yesterday's rate cut, the seventh since the ECB was founded, came amid growing signs that economic growth in the euro zone will be close to zero this year.
The European Commission predicts growth of just 0.4 per cent in the second half of 2003 and the International Monetary Fund expects no growth in the euro zone at all.
The euro rose 2 per cent against the dollar following yesterday's announcement, reaching $1.188 during the afternoon.
The German chancellor, Mr Gerhard Schröder, was among the European politicians who welcomed the move. "This is a measure that will help to promote the positive signs of economic recovery in Germany," he said.
Mr Duisenberg warned that monetary policy alone could not revive Europe's economy and he called on governments to step up the pace of structural reform.
