LONDON: The European Central Bank is undecided on any interest rate increases for the time being, the central bank's vice president Lucas Papademos said in a newspaper interview Sunday.
He told the Financial times, "We did not decide ex ante to engage in a series of interest-rate rises." The central bank had raised its interest rates by 25 percentage points to 2.25 on 1 December. The bank had been reiterating that it has not decided whether more interest rate increases are necessary to keep the inflation on target.
Papademos said the bank is committed to fulfil its mandate to bring in price stability -- an inflation rate “below but close” to 2 per cent. He was hopeful that the last hike will stimulate growth.
He was, however, skeptical that lack of reforms in the labour and product markets in the euro zone could affect growth. Even the bank's forecasts of 2 per cent to 2.5 per cent growth in the zone, mostly based on academic research, may remain unachieved.
He told the paper, "There is a risk that, unless there are changes in policies -- more reforms in labour and product markets as well as in the behaviour of private economic agents -- this range may have to be revised downwards."
ECB's studies in recent times had put the natural rate of unemployment in the region at 8 per cent. This is disappointing, said Papademos, because it implied that the functioning of the labour market affects the conduct of a stability-oriented monetary policy. This is suggestive of a failure on the part of many European governments to bring in labour market and other reforms, which in turn could have an impact on ECB's thinking on interest rates.
Papademos is of the view that if rigidities are removed, monetary policy could support lower unemployment without impacting price stability. He said the ECB cannot mimic the Federal Reserve of the U.S., which has a system of pre-announced interest rate hikes.
This approach was introduced at a time when interest rates were at the very low level of 1 per cent and had stayed at that level for a considerable period, he said. Also inflationary pressures were building up on both the demand and the supply sides of the U.S. economy at that time.
“Our case is somewhat different. First, we had a higher level of interest rates when the decision was taken to change the monetary policy stance. Second, our assessment about the outlook for price stability is that inflation is expected to stay above 2 per cent for a period of time but it is expected to moderate gradually.”
He expected the house prices in the zone not to fall on a large scale although house prices in some countries are overvalued.
Posted
on : Tue, 20 Dec 2005 02:05 GMT | General News
By : Paula Jenkins
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