EURO...ECB dampens rate cut hopes, warns of CPI overshoot
(updates with Welteke, Trichet comments, detail)
By Tomasz Janowski
WASHINGTON, April 28 (Reuters) - European Central Bank
President Wim Duisenberg on Saturday chilled hopes for a
near-term interest rate cut, warning that euro zone inflation
may not return below the bank's 2 percent ceiling this year.
Duisenberg said that even though mainly temporary factors
were keeping inflation high, the ECB feared that it could
become entrenched if the overshoot of its ceiling continued.
"We earlier thought we could return to consumer price
levels of under our upper limit, that is 2 percent, during the
second half of this year," he told a news conference.
"We now think that it may take some time longer, until
early next year, before we reach that goal again. That may
explain why the ECB has kept interest rates on hold," he said.
The ECB has faced repeated calls from politicians, business
groups and economists to join other major central banks in rate
cuts led by the U.S. Federal Reserve, which has slashed
borrowing costs four times this year to shore up growth.
But Duisenberg, speaking after a meeting of finance
ministers and central bankers from the Group of Seven
industrial nations, said recent eurozone price data made it
easier for the ECB, which has kept borrowing costs unchanged
since last October, to argue its case for steady rates.
INFLATION DATA BACK ECB STANCE
"I do believe, it is now widely understood that with
inflation well above (our limit) and expectations that the next
will be even further above our goal, a rate cut would not
enhance the credibility of ECB monetary policy," Duisenberg
said.
Eurozone inflation was 2.6 percent year-on-year in March
and Duisenberg said the next set of data was likely to show
inflation moving even further away from the 2 percent limit.
ECB council member and Bundesbank President Ernst Welteke
said earlier on Saturday the bank's policy was geared to future
inflation risks and it did not need to wait until inflation
dropped below the 2 percent threshold to act.
But he also warned that it would take time before inflation
began falling down towards the ECB's policy tolerance limit and
echoed the ECB's mantra that interest rates remain low by
historical standards and were not hampering growth.
Separately, his French colleague Jean-Claude Trichet argued
that the example of France's strong economic expansion combined
with low inflation showed there was no trade-off between growth
and price stability.
France expects to grow 2.9 percent this year, the fastest
among G7 states, while its inflation running at about 1.5
percent is the lowest in the 12-nation eurozone.
The meeting of the G7, which is made up of the United
States, Britain, Canada, France, Germany, Italy and Japan, was
preceeded by immense speculation that the United States might
press Europe to follow the Fed's example and cut rates.
NO TALK OF EUROPEAN RATE POLICY
But both Duisenberg and U.S. Treasury Secretary Paul
O'Neill said there was no discussion of European interest rate
policy at the meeting. Duisenberg also said that the meeting
offered him "an ideal opportunity" to explain its stance.
"I think that after everything I said in the meeting it was
well understood," he said.
But he left a glimpse of hope for those betting on a rate
cut later this year, saying he assured his G7 counterparts that
the ECB would not turn a blind eye to signs of diminishing
price pressures.
"Such signals will be taken appropriately into account,"
he said.
In fact, Duisenberg acknowledged that inflation risks
stemming from money supply growth have subsided, while slower
than earlier anticipated eurozone growth also helped moderate
price pressures.
He also said the the stickiness of the headline inflation
could be traced back to a sequence of temporary factors.
Last year a surge in oil prices and the euro's decline kept
inflation above the ECB's ceiling, while this year a spike in
food prices caused by "mad cow" and foot-and-mouth diseases
have led to above-target prices increases.
But Duisenberg warned of a risk that such temporary
pressures could be mistaken for a lasting trend, leading to
so-called second-round effects as rising inflation expectations
get translated into higher wage demands and costs.
Economic growth on the other hand, albeit dampened somewhat
by a global slowdown, remained solid, Duisenberg argued, saying
the eurozone should be able to weather relatively well the
impact of the U.S. downturn.
Asked whether the ECB felt more confident of its assessment
of the single currency's strength after better-than-expected
U.S. economic growth in the first quarter, Duisenberg warned
that it was too soon to gauge the impact of an improved U.S.
performance on the outlook for the global economy.
The U.S. economy grew at an annual rate of 2 percent in the
first three months of this year, almost double the market
consensus forecast. But International Monetary Fund Managing
Director Horst Koehler warned on Friday that one set of data
was not enough to say that the U.S. economy was out of the
woods.
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