| Author (Person) | Jones, Tim |
|---|---|
| Series Title | European Voice |
| Series Details | Vol.5, No.13, 1.4.99, p14 |
| Publication Date | 01/04/1999 |
| Content Type | Journal | Series | Blog |
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Date: 01/04/1999 By IF THE hints coming out of the European Central Bank's governing council are to be taken at face value, there will be no further cuts in interest rates without a significant change in economic circumstances either at home or abroad. As they prepare for their council meeting next Thursday (8 April), the ECB's 17 policy-makers are making it as plain as they can without divulging any state secrets that interest rates are low enough. The bank's recently published monthly report for March stated that 'real' euro-zone interest rates - the cost of short-term borrowing once expected inflation is stripped out of the equation - were "still at relatively low levels". Depending on the method used to calculate hard-core inflation, the ECB estimates real rates at anything between 1.8% and 2.5%. Instead of conceding that high real borrowing costs were stifling growth and job creation, the bank called on national governments to implement ambitious reforms to their labour, product and services markets to generate employment. "Priority needs to be given to removing the structural impediments to a higher level of economic activity in the euro area," said the report. Nevertheless, despite the bank's protestations that monetary policy had little more to bring to the growth party, investors revealed their expectation of a near-term rate cut by driving down market interest rates. Market participants speculated that the resignation of German Finance Minister Oskar Lafontaine would be the catalyst for a 0.25-percentage-point cut to 2.75% in the ECB's key refinancing rate. Lafontaine had long berated the bank for keeping real interest rates too high for too long and stifling growth. Investors believed that his departure would make it politically easier for the ECB to cut rates. But this is not so, according to Nout Wellink, the Dutch central bank governor and an ECB governing council member. "Mr Lafontaine's remarks created uncertainty in the markets but there was no postponement nor earlier movement in interest rates as a consequence of his statements," he insisted in an interview with European Voice. Rates have been kept steady at 3% because, although business confidence continues to weaken on average across the euro area and growth is slowing down in Germany and Italy, consumer confidence remains high, money supply growth is above the ECB's target and private sector credit is accelerating. While some economists have been puzzled by the divergence of indicators for consumer confidence and business confidence in euroland, Wellink says the ECB council is not. " Consumer confidence is about the 'feel-good factor' and is determined by the development of employment, unemployment and what is happening in the stock market. The business confidence indicator is determined by what is happening in the industrial sector of the economy," he said. "The declining path of business confidence has a lot to do with the fact that exporters are under heavy pressure from developments in Russia and South East Asia. Sooner or later, they will have to meet. Either the business index will go up or consumer confidence will fall or the two will meet somewhere in the middle." Commentators have suggested that the wild divergence of the confidence indicators was the result of flat or falling prices for manufactured goods. Consumers, after all, love it when palm-top computers halve in price within six months while Psion, Philips and Hewlett Packard are suddenly forced to slash their costs to deal with tightening profit margins. But Wellink believes it has much more to do with the confidence born of watching stock portfolios soar in value as share markets boom from New York to Amsterdam. "In the US, we have the remarkable situation - not seen since 1992 - that household savings are declining," he said. "That is a direct consequence of the stock market since people think they are still saving but in a different way." Given the boom in mutual saving in Europe over the past three years, this wealth effect is being felt more in euroland than ever before. According to investment bank Salomon Smith Barney, net inflows to equity, bond and mixed funds in Germany, France, Italy and Spain last year topped €213 billion, up from €112 billion in 1997 and a mere €33 billion in 1996. " There are many more people involved in Europe than there were ten years ago," said Wellink. "In Europe, it has had an impact on consumption, although much less than in the US, but the effects are visible in both economies." He agrees with the warnings issued by the Organisation for Economic Cooperation and Development that the greatest single threat to economic growth and price stability in euroland lies in this overvaluation of US asset prices, rather than in recession-hit Japan or South East Asia. " It is difficult to judge what is happening in Japan but, what is already visible from the figures is that the situation in South East Asia is improving, especially in Korea but also in Thailand," said Wellink. What the council members will not worry their heads about is the rate of the euro on the foreign exchanges, despite the streams of newspaper reports about the collapsing currency following the mass resignation of the European Commission. Since its inception in January, the euro has lost 4% against a basket of currencies and more than 7% against the US dollar. The OECD recently calculated that a sustained 5% fall in the euro would import inflation of 0.3% into the single currency zone in the following year. But for now, the ECB is unperturbed, although Wellink dismisses suggestions that the bank is practising a policy of 'benign neglect' of the exchange rate. "I don't like the word 'neglect'," he said. "What we are doing is monitoring carefully what is happening with the euro since it is an important element in our strategy. It is quite clear that, at a certain moment, the exchange rate becomes a relevant factor. It is not just the level of the currency which should be taken into account but also the speed of change." However, contrary to some reports in the press over the past month, Wellink said the European System of Central Banks had not intervened in the currency markets to support the euro. Main refinancing rate: 3.00% (confirmed 18 March) Deposit rate: 2.0% Marginal lending rate: 4.5% ECB WATCH Calendar (5-27 April) 5 April
6 April
8 April
12 April
13 April
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20 April
22 April
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26 April
27 April
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| Subject Categories | Economic and Financial Affairs |
