The European Central Bank (ECB) has left interest rates unchanged but its president, Mr Wim Duisenberg, dampened speculation yesterday that rates may soon be cut to prevent a slowdown in the European economy.
Speaking after a meeting of the bank's Governing Council in Frankfurt, Mr Duisenberg predicted robust growth in the euro zone during 2001 and claimed that the euro's long awaited recovery on foreign exchange markets had arrived at last. "It seems to have turned the corner," he said.
Mr Duisenberg declined to indicate whether the next move on interest rates would be upwards or downwards, but he indicated clearly that no move should be expected until well into next year.
With an eye to the annual wage round that begins in Germany in January, the ECB president said that the recent rise in inflation was caused mainly by high oil prices. He warned that it should not be reflected in excessive pay claims.
"Social partners can rely on the commitment of monetary policy to maintain price stability over the medium term and they should continue along the path of wage moderation observed in recent years. In the same vein, fiscal authorities should control expenditure growth, as it could otherwise fuel upward pressures on prices," he said.
Few analysts expect interest rates to move for some time and many believe that the next move will be a cut. The rise in the value of the euro could hit exporters at a time when the business confidence in the euro zone's biggest economy's remains shaky.
The Federal Reserve chairman, Mr Alan Greenspan, said last week that the US central bank must be alert to the risks of a sharp economic slowdown, suggesting that he may be considering a cut in interest rates.
Mr Duisenberg pointed out yesterday that the ECB had a narrower mandate which focused on price stability. He insisted this did not mean that the Bank was indifferent to the economic growth rate in the euro zone.
"In the actual behaviour of the two central banks, I can't really see a difference in behaviour. So that is something that the markets should understand," he said.
Some analysts expected the ECB to raise its target for M3 money supply at yesterday's meeting as an expression of confidence in the impact of the new economy on the euro zone. Such a move would have been interpreted as a sign that the ECB expects structural reforms to boost economic growth.
But Mr Duisenberg said that the bank had decided to leave the money supply target unchanged at 4.5 per cent even though actual M3 growth has exceeded that rate ever since the start of monetary union.
"With regard to the assessment of trend potential output growth, there is still no decisive evidence that measurable and lasting increases in productivity growth in the euro area would warrant a significant upward revision in the assumption for trend potential growth," he said.