BERLIN (MktNews) - The European Central Bank (ECB) should cut interest rates by 50 basis points to guarantee continued wage moderation in the eurozone, the President of the German Economic Research Institute (DIW), Klaus Zimmermann, said in Monday's edition of Germany's business daily Handelsblatt.
"An interest rate cut by the ECB of around 50 basis points would be a clear signal to guarantee a continuation of the (present moderate) wage policy, which would also restrain inflation" in the eurozone, Zimmermann was quoted as saying.
"Inflation forecasts and the measured inflation expectations for the coming years -- which are what matter given the long-term impact of monetary policy -- do not provide any sustainable support for inflationary fears," Zimmermann said.
In addition, Zimmermann said, M3 money supply is a questionable indicator and the energy price rise last year was temporary. "Inflationary fears -- the sole grounds for strong (ECB) action -- are not well founded: Money supply is ample, but it is open to question whether it really is an appropriate indicator to measure inflationary developments. In any case, the inflation rate is falling. The rises in energy prices in 2000 were temporary and did not lead to further wage demands by the unions," Zimmermann said.
"Wage costs in Europe, which are the most important domestic source of inflation, have developed in a stable manner for some time," said Zimmermann.
The DIW chief also pointed out that Germany's economic growth last year was chiefly due to the favorable global economic performance and the euro's weak foreign exchange rate.
"Now, however, uncertainty over the future development of the global economy is growing in a worrying fashion. In particular, the U.S. business cycle is cause for concern. A hard landing by the American economy is still possible," Zimmermann said. "The U.S. central bank has lowered its key interest rates by 50 basis points for the second time because of the development described above. It is not unjustified to believe that this (development) will continue. This time the ECB should have followed the U.S. central bank," Zimmermann said.