ECB will resist rate cut pressure

European Central Bank policymakers stood firm on interest rates yesterday, saying the central bank would resist political pressure to cut and had done the "maximum possible" without risking inflation.

Current ECB interest rates were appropriate and the central bank's monetary policy had no bias towards a rate rise or cut, Governing Council members Christian Noyer and Klaus Liebscher said, stressing the ECB's commitment to price stability.

Stuttering economic growth has led EU finance ministers to call for the ECB to pay more attention to their views in setting interest rates, and some politicians have urged a cut in rates, steady at two per cent for over two years.

But Mr Liebscher, governor of Austria's central bank, said the ECB had heard the same thing before and would not budge from its legal obligations to remain independent and prioritise stable prices.

"We have experienced pressure from politicians since the beginning of the currency union. If there's a little more pressure now, then I see that as the search for a scapegoat for economic problems," Mr Liebscher said.

Mr Noyer, governor of the Bank of France, said the ECB had "pushed the decrease in interest rates to the maximum that was possible" without endangering the ECB's goal of keeping inflation below two per cent.

"We find the current interest rate level to be appropriate based on the data," Mr Liebscher said. "We have no bias."

ECB President Jean-Claude Trichet described the central bank's policy the same way last week, and Governing Council member Jaime Caruana made a similar statement on Monday night.

Nonetheless, markets believe an ECB rate cut has become more likely after the Swedish central bank cut rates by half a per cent to 1.5 per cent earlier yesterday, driving the euro to within a cent of a recent nine-month low against the US dollar.    

"Sweden's larger than expected 50 basis point rate cut is a clear cut signal that European rates are coming down," said Bear Stearns chief European economist David Brown.

"The ECB (should) take very careful note. The downside risks to growth and inflation in Sweden have been the driving force for lower rates. Exactly the same ingredients apply to the eurozone and UK economies," he added in a research note.

Monetary sources have also said that the ECB might have to consider a rate cut more seriously if economic data takes a turn for the worse, though other sources say there is a wide range of opinions on the governing council.

Recent economic developments may have strengthened those, like Mr Liebscher, who believe a "steady hand" is the best approach for the ECB.

Oil prices resumed their upward path in late May and on Monday reached a record high of $59.52, increasing inflation pressures.

"The topic of oil price development is naturally one that we have to carefully observe from the point of view of inflationary effects," Mr Liebscher said, adding the ECB was also keeping an eye on strong money supply and credit growth.

Mr Noyer noted that the rise in oil prices in 2004 may not have worked its way through the economy and could still push up prices for other goods and services.

"Robust growth in certain areas of the world... engendered strong pressures on oil prices that are liable to be durable and result in lagged inflationary effects," he said in the text of a presentation.

The eurozone also got a piece of good economic news after Germany's ZEW investor confidence index posted a better than expected rise to 19.5 from 13.9, which the research institute attributed to the announcement of early elections in Germany and the depreciation of the euro against the US dollar.

However, French data showed that household spending on manufactured goods fell 0.9 per cent in May from April, almost twice the drop which analysts had expected.