The European Central Bank's latest monthly report appears to back away from further interest rate rises in the short term. In addition, further intervention in the foreign exchange markets yesterday appears to have been designed to maintain the value of the euro and prevent further cost pressures and hence rate rises. The ECB appears to believe that interest rates - which it has raised from 2.5 per cent in the summer of 1999 to a current level of 4.75 per cent - have done enough to cool inflation. However there is no guarantee that rates will not continue their upward trajectory next year.
In its monthly bulletin released last night the ECB notes that the acceleration in growth in the euro zone economy and in money supply has been one major factor behind recent rate rises. The Bank now believes that money supply growth is decelerating. The weakness in the euro has also provided much of the impetus behind higher rates as it leads to higher import prices and hence pushes up inflation. Recent currency market intervention, repeated again yesterday, has done much to shore up the currency. It now appears that the ECB is using intervention rather than rate increases to put a floor under the currency and prevent further rises in the price of imported goods.
Of course higher oil prices have also been responsible for much inflationary pressure and again the ECB appears sanguine. In notes that "if oil prices do not rise further, the effects of past oil price increases will gradually drop out of the annual inflation rate". The one area where the ECB is still indicating concern is on future behaviour. It warns that generous tax cutting packages could lead to it rethinking its approach, as could large wage demands. "It is crucial that any loosening in fiscal policy be avoided. Similarly continued wage moderation is important in order to contribute to further maintaining a favourable outlook for price stability," it says.
Market analysts believe that tax cuts in Germany, France and Italy next year along with wage rises will lead the ECB to raise interest rates again at least once in 2001. If interest rates do remain on hold, this is good news for borrowers who have seen repayments rise substantially over recent months. However, the news is less positive for savers and for the property market which appears to have been cooling off at least partly on increased interest rate expectations as borrowers factored in higher repayments to their calculations.
There can be no doubt that if the Central Bank here still had control of interest rates they would be considerably higher. Irish policy-makers would have moved earlier and more decisively to try to take the steam out of the property market and to slow the overall growth of the economy through substantially higher borrowing costs. But the ECB has wider considerations on its mind.