ECB unlikely to cut interest rates over war uncertainty

European Central Bank (ECB) council member Mr Ernst Welteke said yesterday the ECB was unlikely to cut interest rates next week given the uncertainty over the economic impact of war in Iraq.

"The international situation continues to be unclear. If that doesn't change, then we will analyse the situation in Rome but will not come to a [rate move\] decision," Mr Welteke said at a news conference to present the Bundesbank's 2002 results.

Mr Welteke's remarks backed market expectations that ECB policymakers would keep interest rates on hold when they meet in Rome on April 3rd.

"When the geopolitical environment is as it is now, it makes no sense to me to take any sort of action," Mr Welteke told journalists after the news conference.

It was better to wait and see what effects the war would have on the economy, he added.

ECB vice-president Mr Lucas Papademos also emphasised the uncertainty hanging over the economy in a newspaper interview published on Wednesday.

He told the French financial newspaper L'Agefi: "In the present context, it is particularly difficult to evaluate risks hanging over economic activity and to forecast the direction of inflation in the short term."

Mr Papademos is addressing the Institute of European Affairs in Dublin today.

The ECB trimmed borrowing costs by 25 basis points to 2.5 per cent on March 6th and said it was ready to act if needed in the face of financial market jitters over the war in Iraq.

Mr Welteke, who is also Bundesbank president, said it was unclear whether the Central Bank Gold Agreement, which governs central bank gold sales, would be renewed. "Whether there will be another gold agreement is open," he said. The current agreement is due to expire in 2004.

Mr Welteke said he hoped EU governments would quickly reach a decision on filling upcoming ECB board posts. "I hope that the heads of state and government make the right decision soon. That applies not only to the president's position but also for the other executive board post," Mr Welteke said, referring to the successor to board member Mr Sirkka Hamalainen, due to step down at the end of May.

The ongoing discussion over board succession was a burden on the ECB, he added. Its president, Mr Wim Duisenberg, has announced plans to retire on July 9th but will stay on for a limited period if necessary.

Bank of France governor Mr Jean-Claude Trichet is Mr Duisenberg's heir-apparent but is awaiting a verdict following the trial over his role in the near collapse of French bank Crédit Lyonnais in the early 1990s. Mr Trichet was a Treasury official overseeing banks at that time.

Meanwhile, the Internaitonal Monetary Fund (IMF) warned yesterday that a prolonged war in Iraq could tip the world into recession. IMF managing director Mr Horst Köhler said a lengthy war risked jeopardising global recovery.

"In the case of a long-lasting conflict, a global recession can no longer be ruled out," Mr Köhler said in remarks published yesterday. "It depends on how long the war lasts and what damage there is. But even a short war is an additional barrier to a recovery in the global economy."