ECB chief dampens rate cut speculation

Simon Morgan, Agence France-Presse, Dusseldorf

European Central Bank President Wim Duisenberg sought to dampen speculation on Friday that more rate cuts could be on the cards in the euro zone soon, by saying that borrowing costs would only be lowered again if inflation in the region came down faster than expected.

"The ECB would only cut rates if we came to the conclusion that we would have to revise downwards our assumptions regarding inflation over the next one and a half years," Duisenberg said in an interview published in the business daily Handelsblatt.

The current level of interest rates in the 12-country euro zone was "appropriate" and was based on the ECB's current assumptions regarding inflationary developments in 2002 and 2003, he said.

The ECB last cut its key rates by half a percentage point on Nov.8, bringing the central "refi" refinancing rate down to 3.25 percent.

Economists are betting on additional monetary easing early in 2002.

But Duisenberg told Handelsblatt that further rate cuts might not be necessary, should the economies of the 12 countries which share the euro start to recover soon.

The ECB chief's comments were published only a day after the bank issued its latest macroeconomic projections for the euro zone.

According to the ECB's new forecasts, the world's second- biggest economic area is set to attain growth rates of just 1.3- to-1.7 percent this year after growing by 3.4 percent in 2000.

Growth is then expected to slow even further to just 0.7-to- 1.7 percent in 2002.

But the ECB nevertheless believes things will start looking up again during the course of 2002 and the euro-zone economy will return to a path of growth in 2003.

In the newspaper interview on Friday, Duisenberg reiterated the argument that lowering the cost of credit would not have much of an effect on the economy, anyway.

"I don't pretend that monetary policy has no effect whatsoever. But it's definitely not much," he said.

Duisenberg shrugged off repeated calls by politicians for the ECB to kick start the economy by cutting rates.

Whenever there was an economic slowdown, "politicians often use monetary policy as the scapegoat for their own failures," he argued.