ECB?policy wins plaudits

The European Central Bank has received high level support for its plans to continue raising its key policy interest rate next week (7 December), with both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), endorsing the thrust of its monetary policy. ECB rates could continue rising into 2008, the OECD said.

Michael Deppler, director of the European department of the IMF, told European Voice that the eurozone was enjoying a "moderate but sustained and well-balanced expansion", reaping the benefits of some of the structural reforms that had been undertaken. "You have been doing structural reforms for ten years and they are paying off," he said. He added that there was too much pessimism around in Europe about the region’s economic prospects. His main concerns, he said, were that there seemed to be a pause in the structural reform efforts and a number of countries were not taking advantage of the good times to bring their budget deficits under control.

On interest rates, Deppler said that the ECB should continue to raise rates cautiously towards a neutral level, neither stimulative nor restrictive. With the economic recovery on track and loan growth strong in the eurozone, the ECB is expected to raise its policy rate next week 0.25 percentage points to 3.5%.

In its global economic outlook, the OECD, which, like the IMF, had been critical of the ECB for starting to raise rates from 2% a year ago, said, "with the recovery on a surer footing, monetary stimulus should be removed", adding that "if the recovery maintains strong momentum there may be a need to raise interest rates further in 2008 as well".

The OECD sees euro area growth dropping from 2.6% this year to 2.2% in 2007 before rising slightly to 2.3% in 2008.

Both European business and trades unions are calling for the ECB to stop raising rates, fearing that the strengthening euro will hit exports. A weakening US dollar, which has fallen against the euro to around $1.30, has triggered weakness in some financial markets in the past week.

But Deppler argued that at current levels "the euro is fairly valued" in international terms. French concerns about the strength of the euro are being dismissed in other eurozone capitals.

The European Central Bank has received high level support for its plans to continue raising its key policy interest rate next week (7 December), with both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), endorsing the thrust of its monetary policy. ECB rates could continue rising into 2008, the OECD said.