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To: 2MAR$ who wrote (41)	4/28/2001 11:17:21 PM
From: 2MAR$	Read Replies (1) \| Respond to of 208838

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. ((Washington newsroom +1 202 898 8310, fax 1 202 898 83 83, washington.economic.newsroom@reuters.com))