BERLIN (MktNews) - The European Central Bank (ECB) should rapidly cut interest rates by 50 basis points to support growth in the eurozone, since the outlook on wage developments and inflation in the euro area are benign for this year and next, the Berlin-based economic research institute DIW said in its weekly report Tuesday.
The DIW's President Klaus Zimmermann called for a 50 bp cut in ECB rates in a newspaper article published Monday, citing much the same reasons.
DIW forecast that eurozone Harmonized Index of Consumer Prices (HICP) will rise only 1.8% in 2001 and 1.6% in 2002 and that eurozone unit labor costs will increase moderately by 1.3% in the current year and by 1.1% in the coming year.
The institute argued in its report that the ECB is underestimating the potential by which Europe's economy can grow without engendering inflation risks and said the central bank should lower its inflation forecast.
"The (main) short term interest rates (in the eurozone) should be lowered rapidly by 0.5 percentage point (by the ECB). Thus, a neutral level of short term interest rates would be attained," the DIW said in its recent weekly report published on Tuesday.
"The expected further upward revaluation of the euro as well as the continued slowing of monetary growth and inflation rates (in the eurozone) should make it easier for the ECB to give up its restrictive stance" and to support economic growth in the eurozone, the DIW argues.
Sinking oil prices and an estimated prolonged rise in the foreign exchange rate of the euro as well as expected moderate wage settlements will lead to benign inflation rates in the eurozone in 2001 and 2002, the DIW said.
"All in all, it can be expected that HICP will rise by 1.8% in the current year and by 1.6% in 2002," the DIW states.
The ECB's inflation ceiling stands at 2.0%.
"In 2000, unit labor costs have risen by only 0.9% in the euro area, and they will only grow moderatly in the current and the coming year by 1.3% and 1.1% respectively," the DIW added.
The DIW believes the ECB is underestimating the non-inflationary growth potential in the eurozone and overestimating inflation dangers.
"To be able to consistently justify an interest rate cut, the ECB has to move away from its current stance of a non-inflationary growth potential of only 2.25% (in the eurozone) and to lower its inflation forecast accordingly,", the DIW said.
The ECB has forecast HICP growth rates of 1.8% to 2.8% in 2001 and of 1.3% to 2.5% in 2002.
Turning to monetary growth, the DIW criticized that the ECB has not lowered its money supply target for the eurozone, which currently stands at 4.5%.
The DIW pointed out that "already in the past year, liquidity was not ample but rather adequate."
"Besides, the reference value for yearly M3 money supply growth of 4.5% is a low target," the DIW said.