ECB set to leave rate unchanged

Date: 11/01/01

By Tim Jones

A MEMBER of the European Central Bank's governing council has strongly hinted it will not cut interest rates despite the threat of an economic slowdown in the US.

Bank of Finland Governor Matti Vanhala says the ECB should not be bounced into lowering rates while domestic inflationary pressures persist.

His warning flies in the face of market expectations that the ECB will lower the cost of borrowing by as much as three-quarters of a percentage point before September.

"I think, for the moment, the ECB's interest-rate policy is correct," he told European Voice as the bank prepared for a council meeting next Thursday (18 January) - its first since the US Federal Reserve slashed rates to stave off a recession prompted by plummeting stock prices.

"We needed this correction but what we hope now is that the landing will be a soft one," he said. "Quite a few people have written too much drama into this. That's understandable but it's not the same thing as macreconomics."

He added that "upside risks" remained to the ECB's target of keeping annual inflation below 2% and warned it could not yet be certain about the impact of last year's oil price rise and euro weakness.