Duisenberg dashes hopes of eurozone interest rate cut

Wim Duisenberg, the embattled head of the European Central Bank, yesterday held firm in the face of mounting calls for a cut in interest rates.

The ECB president told MEPs the current monetary policy was appropriate, dashing any lingering hopes that the bank would cut rates tomorrow.

"The risks to price stability over the medium term are at present balanced. We thus consider the current level of ECB interest rates to be appropriate," Mr Duisenberg said.

The bank has held its benchmark lending rate at 3.25 per cent since last November, instead warning that it remains worried by potential inflationary pressures from wage demands and the oil price. But with growing signs that Germany, the largest of the 12 economies in the euro area, could be heading for recession, calls for a rate cut have been mounting.

Wolfgang Schuessel, the Austrian Chancellor, yesterday repeated his demand for a rate cut. "It would help to think of possible alternatives, also within the ECB, to stabilise the European economic situation," he said.

But Mr Duisenberg responded by blaming member states of the euro for failing to implement reforms, which he said were needed to tackle high unemployment. "You could find an answer if governments finally embarked on ambitious structural reform programmes all across the euro area," he said.

He added that it would be a "major disaster" if the ECB cut rates but failed to see any improvement in growth as it would undermine the bank's credibility. Mr Duisenberg's stance on monetary policy came as little surprise to the financial markets, as it echoed comments in the bank's latest monthly bulletin.

The euro fell against the dollar in a sign that the markets believe a rate cut is needed to give a kick-start to economic growth in the region.

Neville Hill, an economist at CSFB, said: "It seems that growth data will have to remain weak, inflation stay subdued and finance ministers maintain their budget commitments, before the ECB will consider easing."

Economists are also doubtful about a rate cut in the UK when the Bank of England's Monetary Policy Committee finishes its two-day meeting tomorrow.

Meanwhile in the US President Bush said he was determined to ensure that government economic policies boosted growth. "I want you to know I am optimistic about our future," he added.