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Monday, 2 April, 2001, 10:44 GMT 11:44 UK
IMF calls for euro rate cut
European Central Bank
The ECB is under increasing pressure to cut rates
The influential head of the International Monetary Fund, which monitors the world economy, says the European Central Bank should follow the US example and cut interest rates.

"The US has, through aggressive interest cuts, correctly demonstrated decisiveness and, if need be, has further room for manoeuvre," Horst Koehler told the German Bundestag, the lower house of parliament.


(The euro) remains, from my point of view, weak

Horst Koehler, Managing Director, IMF
"A European Central Bank rate cut would undoubtedly be helpful for the European economy," he added.

Mr Koehler's remarks follow widespread speculation that the ECB would cut interest rates at its next meeting on 11 April.

After its last meeting on Thursday, where the bank made no change in interest rates, the euro came under renewed pressure on foreign currency markets.

The euro hit a 15 week low of $0.8750 in Asia on Monday before recovering slightly on strenghening hopes of a rate cut.

The central bank has been under increasing pressure from Germany and France to cut rates to reverse a projected slowdown in economic growth and a reduction in business confidence.

But it has been held back by fears that inflation is still above target, and worries by some smaller countries like Spain and Ireland that a rate cut would further boost their booming economies.

The ECB is the only major central bank that has not cut interest rates this year.

Plea for independence

Meanwhile Juergen Stark, the deputy head of the Bundesbank, the German central bank, said that Europe should follow its own path.

"The ECB is pursuing its own strategy, geared to European conditions. Its decisions are based on its own analyses. It is not sailing in the wake of the US Federal Reserve," said Mr Stark.

"Hectic responses by central banks transmit themselves to the markets and increase volatility," he added.

However, Mr Stark admitted that European inflation was likely to fall back to the ECB's target level of 2% by the autumn - clearing the way for rate cuts later in the year.

Fears on growth

Horst Koehler said that the IMF was downgrading its growth forecast for the 12 country eurozone to 2.5% this year as the US slowdown impacts on Europe. It had previously forecast about 2.7% to 2.9% growth.

Nevertheless, Europe would grow faster than the US this year, but slower than the average for the whole world economy.

Mr Koehler said that the world economy was "in a critical phase" but believed that it could maintain an overall growth level of 3% - a downgrade from the previous forecast of 3.4%.

He also said that he believed that the European single currency, the euro, was dramatically undervalued.

The euro "remains, from my point of view, weak", Mr Koehler said.

The euro has fallen by nearly 30% against the dollar since it was launched over two years ago.

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See also:

29 Mar 01 | Business
Eurozone rate cut on hold
11 Jan 01 | Business
ECB admits fallout from US slowdown
01 Apr 01 | Business
Sniffing out an ECB rate cut
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