Speaking to the European Parliament, Wim Duisenberg argued that interest- rate cuts were not the answer to the global economic crisis, which he believes will "dampen" European growth next year. The ECB chief said Italy, Spain and Ireland would all have to cut rates substantially before year- end.
Disappointing the City, Mr Duisenberg did not detail how ECB monetary strategy will work when it comes into force.
He said: "We in Europe are very much in the process of the run-up to monetary union. We don't want this process to be interrupted by moves in interest rates, co-ordinated with whoever, and especially not with those with significantly higher interest rates."
Mr Duisenberg's remarks were echoed later by Jean-Claude Trichet, governor of the French central bank and member of the ECB governing council. Mr Trichet said cuts were not on the agenda for France or other core European countries.
Mr Duisenberg yesterday repeated his view that European short-term rates would converge by the end of the year.
The ECB chief said the so-called "convergence rate" will be close to 3.3 per cent, the short-term rate prevailing in Germany and France. This implies a substantial loosening of monetary policy in Ireland, Italy and Spain, where rates are 6.19 per cent, 5 per cent and 4.5 per cent respectively.
City analysts expect the ECB's monetary policy strategy to be a combination of monetary growth targeting and inflation rate targeting.
David Mackie at JP Morgan said: "There is little difference, at least in practical terms, between targeting money supply and targeting inflation. If they cannot agree on this relatively simple question, how are they going to be able to agree on setting interest rates, which is much more difficult?"
William McDonough, a US Federal Reserve governor, said the balance of economic risks had shifted from inflation towards inadequate growth, reigniting market hopes of an early easing in US interest rates.
On co-ordinated cuts, however, Mr McDonough said there were "sufficient differences in the conditions of G7 countries that a co-ordinated cut in interest rates probably would not directly serve the purpose of sustained economic growth in each of the countries".
Outlook, page 19