Row hots up over ECB’s stance on interest rates

Date: 26/04/01

By Peter Chapman

THERE could be blood on the carpet at the G7 meeting in Washington this weekend as transatlantic relations hot up over Europe's opposition to action to pull the global economy out of its current downturn.

Taking the blows will be European Central Bank chief Wim Duisenberg - who will be in America to defend the bank's stubborn refusal so far to follow the lead of his US counterpart Alan Greenspan and slash interest rates in a bid to spur economic growth.

Notice of the row was served last week when US Treasury Secretary Paul O'Neill said he was "mystified" that the ECB thought Europe would be insulated from the US slowdown without cutting rates.

His views were echoed on Tuesday by International Monetary Fund chief Horst Koechler, who said it was vital for Europe to play its role in warding off a global slowdown by cutting rates.

Duisenberg also came under attack at last week's informal 'ecofin' meeting in Malmö. He has always insisted that price stability is the bank's prime concern and that inflation remains a risk in the euro zone.

He said O'Neill is labouring under "misconceptions". Data showing weak economic sentiment in Germany and Belgium adds to the pressure on the ECB to cut rates at its meeting today (26 April).

But currency traders said ahead of the meeting that they expect the ECB to resist major cuts, amid fears that inflation is still a threat in the 12-country currency zone.

The euro has been trading lower against the dollar as a result of these expectations.

Failure to drop the euro zone's key bank rate from 4.75% will add to the venom at this weekend's gathering of top industrial nations.

The row over euro bank rates came as the European Commission shaved 0.4% off its growth forecast for the 15-member bloc for 2001.

Commission finance chief Pedro Solbes said he now expects growth to be 2.8%, down from the October forecast of 3.2%.

Despite the lower target he, too, played down the consequences of the US slowdown for the EU.

He said they are expected to remain limited thanks to "resilient domestic demand" and because the US is expected to pick up later this year.

Solbes also issued the EU's annual 'broad economic policy guidelines', telling EU member states to continue with policies he urged in 2000.

There could be blood on the carpet at the forthcoming G7 meeting in Washington as transatlantic relations hot up over Europe's opposition to action to pull the global economy out of its current downturn.