Outlook: Euroland rates

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The Independent Online
ACCORDING TO this month's report from the European Central Bank, there is no need to cut Euroland interest rates "for the foreseeable future". Since it was published, the OECD has downgraded its growth forecast and called for lower rates; the European Commission has indicated it will slash its growth forecasts to be published next week; and members of the ECB council have said they expect growth this year to be no better than 2 per cent. No wonder Otmar Issing, the ECB's chief economist, noted this week in a classic display of German humour: "The foreseeable future ends when we cut rates."

It should end on the Thursday after Easter. There is no excuse at all now for Euroland interest rates not to fall. Oskar Lafontaine has gone. Indicators of growth in the big core economies have weakened. Even monetary growth, the talisman for German-influenced central bankers, has slowed, according to new figures yesterday.

The biggest obstacle to a cut, analysts suspect, has been the weakness of the euro. In itself a weaker exchange rate loosens monetary conditions and should stimulate growth. The new currency sank to yet more record lows against the dollar and sterling yesterday.

To react to a falling currency by holding rates risks a perverse effect, however. For the main reason the euro is weak and the Anglo-Saxon currencies strong is the likely difference in growth rates, not the interest-rate differential. Investors are buying into the economies they think will perform well in 1999, rather than sluggish Germany, Italy and France. So a move by the ECB might help to underpin the euro rather than undermine it further.

The final possible obstacle to a rate cut is the bankers' insistence that member governments must show their commitment to prudent budgets and structural economic reform. Fair enough - the continental economies need such policies. But there is no way the politicians can boost growth quickly through such difficult and slow structural measures. Not are they likely to build enough support for the policies without faster growth - Thatcher-style confrontation will not work in Euroland. So the next move is down to the bankers, and the sooner they make it the better.