Interest rates said to be now `on hold'

Interest rates are on hold for the foreseeable future, but inflation has peaked, according to two of the most senior central bankers in Europe who also said political union is on the horizon. Speaking at a meeting in Davos on the likely future direction of the euro and the dollar, Bundesbank president Mr Ernst Welteke said the European Central Bank is not likely to cut rates in the immediate future, even if the US Federal Reserve reduces US interest rates again early next week.

According to Mr Welteke, the European economy is showing no signs of a slowdown despite the almost zero growth expected in the US over the next few months. He added that German growth this year is likely to reach 2.75 per cent as predicted. Latest official figures show that as recently as the third quarter, the US economy grew at an annual rate of 2.2 per cent. Over the same period, the euro zone expanded by an annualised 2.8 per cent. He added that Europe's economic dependence on the US "is not as dramatic as it used to be". Europe is benefiting from strong economic growth in eastern and central Europe. Of course, it will not be completely unaffected, but other regions, such as Asia, that are more dependent on exports to the US are "in more danger".

Mr Welteke said Germany is being boosted by a corporate and income taxes cut that came into effect on January 1st. At the same time, most industries are still taking advantage of moderate wage increases brokered last year that have boosted companies' international competitiveness. Employment has also risen in the past year, underpinning growth. "My view is that we are in a satisfying position." He added that there are "no signs that our monetary policy should change direction" at the moment and that the ECB rate is "on hold" at 4.75 per cent.

ECB chief economist Mr Otmar Issing was also upbeat. He insisted that the current high rates of inflation across the euro zone are only temporary and will fall back in line with oil prices. He also said the euro will continue to benefit from bond sales. However, he added that the exchange rate is not a target of the ECB.

In a move likely to provoke British anti-European sentiment both Mr Issing and Mr Welteke also said that a European political union is likely to be down the road. According to Mr Welteke a "single government will follow the single currency".

Mr Issing also admitted that he had been sceptical about putting a single monetary policy into place before the political structures. "But the question is now can it work without political union."