The European Central Bank (ECB) has revised its strategy for setting interest rates, aiming for inflation "close to" rather than below 2 per cent in a move that should pave the way for lower interest rates.
Despite this the Bank's Governing Council left interest rates unchanged yesterday at 2.5 per cent, driving the euro to a four-year high against the dollar and to its highest ever level against sterling.
The euro reached $1.15 yesterday, just two cents lower than its level against the dollar when the single currency was launched in January 1999. Against sterling, the euro reached 71.87 pence, compared with 71.72 pence in 1999.
Announcing the changes in monetary policy strategy, the ECB President, Mr Wim Duisenberg, insisted that there had been no change in the ECB's definition of price stability.
But he said that the "clarification" underlined the ECB's commitment to avoiding deflation as well as inflation.
The news came amid signs that Irish inflation - currently the highest in the euro zone - easing. Figures released by the Central Statistics Office (CSO) show that inflation dropped from 4.9 per cent to 4.3 per cent over the month of April. Euro-zone inflation is currently in the region of 2.1 per cent. The fall in Irish inflation was attributed to falling oil prices, lower euro zone interest rates and the continued weakness of the dollar.
Lower mortgage repayments and a monthly easing in petrol prices were also a factor. Much of the upward pressure on Irish inflation was attributed to areas linked to Government policy such as education costs and excise duties.
Mr Duisenberg said that the ECB's monetary policy would not have been any different over the past four years if the new strategy had been in place, adding that the changes were as much about presentation as substance.
"It is a big effort on our side to improve presentation. A central bank must have confidence and credibility. It can only have that if it is understood. To a very large extent this is an effort on our part to be better understood," he said.
Mr Duisenberg played down the risks to exporters of the soaring euro, which has risen 9 per cent against the dollar in the last six weeks. He said that euro-zone exporters remained competitive and that the exchange rate reflected the fundamental health of the euro-zone economy.
"One can say that the euro at the moment is about at the level which better reflects the fundamentals and it is roughly at average historical levels. So, there is not yet anything excessive about the level. The speed at which it is strengthening is almost equal to the speed at which it declined two years ago. And that is a matter which we will closely watch in the near and more distant future," he said.
Mr Duisenberg said that the euro-zone economy remained on course for recovery later this year, with the upturn gaining strength in 2004. He said that the end of the war in Iraq should contribute to a global recovery but warned downside pressures remained.
"First, there are the risks originating from the past accumulation of macroeconomic imbalances outside the euro area, and lately concerns have arisen with regard to the SARS virus. Moreover, there is also some uncertainty over the extent of the adjustment still needed in the euro area corporate sector in order to enhance productivity and profitability, which could have an impact on employment growth and thus private consumption," he said.
The Governing Council discussed "extensively" the arguments for cutting rates but Mr Duisenberg said that most arguments pointed to waiting a while before the next move.
"The reasons for not changing rates were manifold today. We need more information, we need more information on whether recent developments - in particular, I am also thinking about the exchange rate here - will continue or peter out. Or will they even reverse? We do not know yet," he said.
Analysis: page 2; ECB should copy Fed: page 5
