--But RWI Forecast Assumes No ECB Rate Cut Until 2003

BERLIN (MktNews) - The European Central Bank (ECB) will likely cut official interest rates when the past rise in oil prices and the past weakness of the euro on foreign exchange markets no longer exert any inflationary pressure, Germany's RWI economic research institute said Thursday.

"As far as the interest rate policy of the ECB is concerned, taking back the interest rate increases since summer will be appropriate at the latest when the oil price and the euro's weakness no longer place a strain on consumer prices," the RWI -- one of the country's six leading economic think-tanks -- said in a summary of its latest forecast for the German economy. However, an RWI spokesman said that the forecast itself -- which left the institute's prediction for German growth in 2001 and 2002 unchanged at 2.8% -- was based on unchanged rates.
"Our forecasts are based on unchanged interest rate through the end of the forecast period, which ends December 31, 2002," an RWI spokesman said.
But in the text of its report, the RWI underlined elaborated its view on ECB rate policy.
"We assume that HICP (harmonised index of consumer prices in the eurozone) will gradually fall below the (ECB's) 2% inflation-limit. Therefore, the ECB should leave rates unchanged over the prediction period (2003)," the RWI said. "In particular, there is no need (for the ECB) to follow the interest rate cuts by the Fed. A steady hand policy would also underline the stability-oriented gearing (of the ECB)," the RWI said. "However, part of such a (stability-oriented) policy should be that the ECB take back its last interest rate increases as the euro recovers and oil prices ease," the RWI said.
Despite easing price pressures in the eurozone, the RWI believes that the 225 basis points interest rate hikes by the ECB since November 1999 continues to dominate the monetary environment.
Should European growth slow more quickly than expected and price pressures ease more rapidly this would signal "a clearer reduction in benchmark interest rates," the RWI said.
In the summary of its report, RWI said it expects that: "Unit wage costs will increase only slightly, pressures from import prices will ease due to lower oil prices and the stronger euro. Therefore, price pressures will flatten out." "On balance, the economic environment is improving, even though external impulses will weaken -- as mentioned above -- and monetary conditions will be further dominated by last year's monetary tightening despite the euro's appreciation," the RWI said.
Turning to Germany, the RWI left unchanged its 2.8% forecast both for 2001 and 2002 GDP growth, since it expects no major impact from the downturn of the U.S. economy and last year's rise in oil prices.
"The weakening of the business cycle in the United States and last year's significant rise in oil prices will not sustainably harm the German economy. GDP will grow by 2.8% both in 2001 and 2002," the RWI said.
The predicted loss in export demand this year due to the global weakening will be offset by a rise in domestic demand, the RWI predicted. Tax cuts, buoyant equipment investment and an expected recovery in construction investments in 2002 will help stimulate economic growth, the RWI said.