FOCUS-Monetary policy gets trickier for Duisenberg
03:02 p.m Sep 11, 1998 Eastern
By Scott Miller
FRANKFURT, Sept 11 (Reuters) - European Central Bank President Wim Duisenberg warned on Friday that monetary policy had become trickier in recent weeks but promised interest rates would still converge before the launch of the euro.
Duisenberg told a news conference after an ECB governing council meeting that the process of rate convergence had hit a hiccough in the last few weeks.
But he stressed that rates would harmonise by the end of this year and that there would be no ''big bang'' convergence at the ECB's first meeting in January.
''I can assure you that on December 31, 1998 interest rates in the short end and long end will be broadly in line with each other,'' Duisenberg said. ''The money policy environment has become more uncertain.''
With less than four months to go before the launch of the single currency, nearly 300 basis points is separating the securities repurchase rate levels of low-growth countries like Germany, and the highest interest rate nation, Ireland.
And with worries about a global economic slowdown mounting, many in Germany, including some at the Bundesbank, are openly wondering if rates should be lowered further.
That would make it even harder for high interest rate nations to achieve a common rate and further raise the threat that easier credit would bring on inflation there.
''The process of convergence is a process which has been going on for 3-4 years. Certainly there can be a hiccough, and that was the case in the last few weeks, but I'm sure it (the convergence) will continue,'' Duisenberg said.
The central bank chief seemed to acknowledge concerns about a global economic slowdown, saying that financial market turmoil in Asia and Russia was making his job more difficult and that Europe, which has a healthy domestic economy, could not avoid being caught up in global economic weakness.
''One may think of indirect influences resulting from changes in confidence, saving and expenditure within the euro area,'' he said. ''We have to take these risks seriously.''
But he was quick to add that economic expansion within the 11 nations that will adopt the euro in January remained on track, with private consumption and investment boosting growth in the first quarter.
''More up-to-date indicators point toward continued expansion in the second quarter, albeit at a possibly more moderate pace than in the first quarter,'' Duisenberg said.
The lanky Dutchman also said that inflation should remain under control for the forseeable future and that although the harmonised euroland inflation rate is now only 1.4 percent, there was no danger of deflation.
Duisenberg was repeatedly asked about the dollar, which has fallen steeply against the mark and other European currencies this week, but answered there was no cause for alarm just yet.
''It (the dollar) has over the last two weeks indeed fallen rather sharply. If that were to continue, it would become a matter of concern. So far it is not,'' he said.
In addition to studying the economic environment in the run-up to monetary union, the ECB is feverishly putting the finishing touches to operating procedures.
Probably the most important decision yet to be made is what form of monetary policy strategy it will adopt.
Many expect the central bank to rely on a two-pronged strategy, focusing on monetary aggregates and inflation targets -- but analysts believe debate over the strategy has been intense among member national central banks.
Duisenberg acknowledged that it has taken longer than expected to finalise the strategy, but that its formulation has only been slowed by the complexity of the issue.
''Discussions have been deep and fruitful but also rather more difficult than any of us had anticipated earlier,'' he said, adding that details of the stategy would be presented in ''good time.''
Another contentious issue at the ECB has been how profits the central bank makes from issuing money should be divided up among the 11 member nations.
But flanked by ECB vice-president Christian Noyer, Duisenberg said it was not important for the ECB to decide on profits just yet.
''Work is being done by the experts...But it is not our highest priority. It will only become relevant once we have made a profit,'' Duisenberg said.
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