European Central Bank president Mr Wim Duisenberg again signalled yesterday that euro-zone interest rates were likely to be left unchanged when the central bank's policymaking council meets tomorrow.
But his remarks carried more significance following France's refusal to meet its obligations under the EU Stability and Growth Pact, designed to maintain fiscal discipline in the euro zone. Mr Duisenberg, however, was in no mood to accommodate the French by easing monetary policy.
On the contrary, he repeated the bank's policy mantra that rates were "appropriate" and insisted the ECB was right "to keep its powder dry" given the uncertain economic outlook.
He made clear that it was up to governments to spur recovery by pursuing tax and labour market reforms, warning of "a major disaster" if the ECB made what proved to be "an ultimately fruitless" attempt to boost growth by cutting rates.
The ECB is particularly nervous about signs that the fiscal discipline enshrined in the stability pact is at risk. "It may be reluctant to ease rates while governments are failing to stand by their commitments to tighten fiscal policy," said Mr Mark Cliffe of ING.
Yesterday Mr Duisenberg again urged euro-zone states to stick to the terms of the pact, although he insisted that punishing finance ministers was not part of the ECB's monetary policy.
But with growth faltering something has to give, say economists. With little room for fiscal manoeuvre, given that the three largest economies - Germany, France and Italy - are close to their 3 per cent deficit limits, hopes are pinned on monetary policy.
In his testimony before a European Parliament committee yesterday, the ECB president again emphasised the downside risks to growth and noted that inflationary pressures "had declined".
Despite the strong words, economists think the overall thrust of Mr Duisenberg's comments represents a gradual inching towards an "easing bias" in monetary policy.
"Our best guess is that rates will be left on hold this week but we continue to look for a cut by the year end," said analysts at Goldman Sachs.
Given global economic uncertainty, however, caution remains the overriding sentiment at the bank and few expect it to move quickly. The ECB is concerned that strong money supply growth, wage rises and higher oil prices all pose a threat to price stability and need to be monitored closely.
The bank's earlier hopes that inflation would fall below its 2 per cent ceiling have been frustrated, and it is now cautious about acting on the presumption that it will do so soon. - (Financial Times Service)
