The European Central Bank (ECB) may move to reduce interest rates again, the president of the Bundesbank, Mr Ernst Welteke has hinted. He said yesterday that if inflation fell, or the euro appreciated this could clear the way for the ECB to cut rates again, following its move to reduce them by a quarter per cent last week.
"The financial conditions are now favourable in Europe and there is hope that consumer demand will increase. We can hope that the growth rate will begin to accelerate again at the end of the last quarter of this year," he said, speaking before a talk to the Financial Services Industry Association in Dublin last night.
Mr Welteke was also cautiously optimistic about the US. "I tend to find the prospects of the start of a modest recovery towards the end of this year plausible and encouraging."
US data published yesterday signalled that US purchasing managers were becoming more optimistic, although the sector is still contracting. The National Association of Purchasing Managers (NAPM) index rose in August to 47.9 the highest level in nine months, a sign the worst may be over for the nation's factories and that the economy is set to pick up. This data, combined with news of the Hewlett-Packard/Compaq merger sent the US soaring.
Mr Welteke warned that he would be reluctant read too much into one day's news. "I am not convinced you can rely on only one set of data." However, the news was enough o give a serious boost to the dollar which rose to $0.8965 from $0.9076 yesterday. According to Mr Jim Power, investment director at Friends First the Hewlett-Packard/ Compaq takeover also boosted the dollar as the markets saw it as positive for the US corporate sector and tech firms in particular.
Mr Welteke would not be drawn on an optimal level for the euro but he did say that for a central banker a "high rate is always better than a low rate and then there is room for reducing interest rates".
He added that while industry and exporters liked a weak currency to enhance competitiveness this would "always lead to costs later on". He also said that if consumer price inflation came in at below 2 per cent it could create room for rate cuts.
He insisted that the ECB's job must be to maintain price stability but once it has done that it can support other goals such as employment or economic growth. He rejected criticism that the latest cut was too little too late saying it was "just in time".
He also admitted that the ECB had misjudged the impact of the US slowdown on Europe saying that globalisation had brought the economies even closer together than the central bankers had thought. "The evolution of the slowdown in the US highlights how important and how effective financial markets are. The speed at which the slowdown spread around the world underlines this importance."
He also rejected calls from German politicians such Mr Hans Eichel for changes to the Growth and Stability Pact. On the Tobin tax which would tax all cross -border financial transactions, potentially netting billions in revenue Mr Welteke was sceptical. "It appears to people that this would be an easy instrument to use. However, it would have to be implemented in every country in the world" which would not be easy, he added.
