Further pressure on ECB to cut rates in euro zone

The International Monetary Fund (IMF) has joined the growing band of international observers putting pressure on the European Central Bank (ECB) to cut interest rates. In its World Economic Outlook, it adds that the Republic would have to consider cutting back on Government spending in the event of any such cut. The call echoes proposals from the European Commission earlier this week that spending should be limited to around 4 per cent next year, from a current rate of 21 per cent.

A top IMF official said the ECB's refusal to cut interest rates has made the euro zone "part of the problem" of slowing global growth.

The bank continues to operate a wait-and-see policy on rates.

IMF research director Mr Michael Mussa said the ECB, which had earlier decided to keep interest rates at 4.75 per cent, was now in a better position to trim rates, with global economic growth easing and inflation relatively tame.

"When a general economic slowdown is the main problem. . . the euro area, the second-largest economic area in the world, needs to become part of the solution rather than part of the problem." Nobel prize winning economist Prof Robert Mundell also called on the ECB to cut interest rates. "The ECB can afford to cut rates. The US has cut by two full percentage points. In a world slump, the European economy would be badly affected and a cut would help ward off the danger."

He added that the reason why the ECB was not cutting interest rates could be worries about the exchange rate.

According to the IMF, there is no need for most euro-zone economies to use tax cuts or spending hikes to boost activity because of the amount of potential in interest rate cuts.

However, it warned that states facing overheating pressures should avoid spending rises or tax cuts even if, like the Republic, they are running a substantial surplus. "If monetary policy is eased during the year, Ireland may need to consider offsetting fiscal measures."

Prof Mundell called on Minister for Finance Mr McCreevy to reign back day-to-day spending increases, which he said were unsustainable and risk cutting off economic growth.

This is despite recognition from the IMF that the slowing world economy will impact on the Republic. "Weakening external demand will help reduce overheating pressures on the countries on the periphery, especially Ireland, which receives substantial US foreign direct investment and whose economy is relatively technology intensive."

The IMF has predicted that growth will reach 7 per cent in terms of gross domestic product this year, falling to 6.2 per cent next year. This is slightly below the European Commission forecast of 7.5 per cent growth, issued a day earlier.

The Republic ranks as the fastest growing of the advanced economies surveyed. The next highest is 5 per cent forecast for Singapore. The average forecast for the euro zone is 2.4 per cent. The IMF also predicts inflation of 4 per cent this year in the Republic and 3.3 per cent next year, in line with Commission forecasts. Unemployment will run at 3.7 per cent in both years, according to the IMF.