The European Central Bank yesterday gave one of its strongest hints that it will cut interest rates tomorrow as it admitted the danger of a deflationary slump in Germany was "utterly serious".
Wim Duisenberg, the ECB's president, said the surge in the euro would help push inflation well below its 2 per cent target next year. "Not least due to the appreciation of the euro, inflationary pressures have declined significantly over recent months," he told a conference. "This assessment will of course be reflected in our deliberations on monetary policy."
The bank meets tomorrow and is widely expected to cut its base rate by at least a quarter-point to 2.25 per cent, which would be the lowest rate for Germany since the end of the Second World War.
Rob Carnell, senior international economist at the Commonwealth Bank of Australia, said: "This is about as clear a pointer as one ever gets from the inscrutable ECB chief. It signals not just that we will get a cut, which we are now treating as a given, but that we will get a significant cut, for example, 50 basis points."
Mr Duisenberg was in Berlin with Alan Greenspan, the chairman of the US Federal Reserve, Bank of England Governor Sir Edward George and the heads of the French, German and Japanese central banks. Ernst Welteke of the Bundesbank said Germany was seeing falls in inflation rather than deflation but said that could not be ruled out. "Let's call a spade a spade...even after discounting ... media hype, the debate on the danger of deflation is still utterly serious," he said. "We cannot, however, completely rule out the possibility that Germany might experience a period of mild deflation in the near future, the combination of a deep confidence crisis, the appreciation of the euro and the negative wage risks are behind that risk."
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