Duisenberg raises hope of rate cut
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Your support makes all the difference.WIM DUISENBERG, president of the European Central Bank, yesterday raised hopes of a cut in European interest rates before the single currency begins when he said monetary policy could be used to fight unemployment.
"In specific circumstances, if production, inflation and employment all move in the same direction, monetary policy can play some role in stabilising output and employment growth without endangering price stability," he said in a speech at the Royal Institute of International Affairs in London.
"Price stability is not an end in itself: it creates the conditions in which other, higher-order, objectives can be reached. In particular, I share the deep concerns about the unacceptably high level of unemployment in Europe," Mr Duisenberg said.
Economists interpreted the speech as a strong signal that the European Central Bank will fix rates at 3 per cent when it meets on 22 December, a rate 0.3 per cent lower than previously expected.
Some anticipate that rates in the Euro zone will get as low as 1.5 per cent by the middle of next year as the ECB is forced to combat deflationary pressures. Gerard Lyons, an economist at DKB, the Japanese bank, said: "It is quite clear that the core rate is going to go down and it's possible that interest rates could be cut within the next three weeks. The big question is whether it is before or after the single currency starts."
There is growing economic pressure on the ECB to adopt a doveish approach following weak data on output and economic growth in Germany and France. Inflation is running at just 0.5 per cent in France and 0.7 per cent in Germany.
"Growth is slowing quite dramatically and the inflation readings are coming in low. You could end up with inflation of 1 per cent and growth of 1 per cent if the ECB can't show it is willing to ease," said David Mackie, an economist at JP Morgan, the investment bank.
The core rate will be based on the Franco-German convergence rate of 3.3 per cent. Economists believe a cut could take place as soon as Thursday, when the Bundesbank board holds a penultimate meeting on interest rates.
Mr Duisenberg also surprised economists when he said: "I know of no central bank which has been so open and transparent as the European central bank." Asked about publishing minutes of committees setting interest rates, he said he was "not an admirer" of the practice.
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