Interest rates are likely to remain low into next year as inflation stays firmly under control, the president of the European Central Bank (ECB), Mr Wim Duisenberg, has indicated.
In his clearest hint to date that rates will remain unchanged at 2.5 per cent through next year, Mr Duisenberg predicted that inflation would not represent a threat within the euro zone for the next 15 months.
"The outlook for price developments is favourable. At the end of 2000, inflation will still be well below the 2 per cent ceiling," he told Irish journalists in Frankfurt yesterday.
Although he acknowledged that there is a broad divergence in inflation rates in different parts of the euro zone, Mr Duisenberg played down the threat to price stability in the Republic. Insisting that the ECB must devise monetary policy for the euro zone as a whole, he said Irish policymakers must take action to dampen any inflationary tendencies that arise.
"You have to seek recourse to other types of policy - fiscal policy, wages policy, economic policy in general," he said.
Mr Duisenberg gave an upbeat assessment of the prospects for an economic recovery within the euro zone and claimed that the ECB's decision in April to cut interest rates by half of a percentage point may have contributed to the improved climate.
"The slowdown appears to have been much less pronounced than we had expected. The current outlook for the euro area is definitely brighter than it was a year ago," he said.
Despite this improved outlook, Mr Duisenberg showed little sign of the tightening bias that he recently declared was creeping into the Bank's monetary policy "at snail's pace".
Instead, he suggested that the ECB would take "a less activist approach" to interest rates than such institutions as the Bank of England.
"`We explicitly have a medium-term outlook. We will refrain from efforts to fine-tune the economy by making frequent adjustments as new data come in," he said.
Mr Duisenberg warned, however, that money supply and private credit were out of line with the Bank's guidelines and said he would remain vigilant to these threats. He suggested that some of this expansion in credit may be due to the wave of business mergers that followed the launch of the euro but said the ECB was monitoring the developments closely. `We see a very strong increase in credit to the private sector, month after month, increasing at an annual rate of 10 per cent. We are trying to determine where that credit is going to," he said.
Playing down concerns about the euro's low exchange rate against the dollar, Mr Duisenberg claimed that exports and imports within the euro zone had little impact on the economy. But he acknowledged that a sustained fall in the value of the currency could undermine the public image of the euro.
Although Mr Duisenberg has regular meetings with finance ministers from the euro zone states, he has not made any specific suggestions to the Irish Government about its management of the economy.
"I talked extensively with the Irish Minister for Finance last weekend but I must confess that we talked more about golf than about anything else," he said.
