By Thomas Widder
BERLIN (MktNews) - Current inflation and economic data would have justified a rate cut by the European Central Bank following its meeting today, Willi Leibfritz, chief economist at Germany's respected Ifo economics research institute, told Market News International on the sidelines of a conference here Thursday.
"It would have been justified to cut interest rates right now," Leibfritz said after the ECB's decision to leave rates unchanged. "I do not urge the ECB to cut rates massively, but rather to do something soon," Leibfritz said. "An appropriate, moderate rate step would be a reduction by 50 basis points," he added. "The current interest rate on a real basis is somewhat too high," he continued.
Leibfritz warned that the failure of the ECB to cut rates soon poses the danger that M3 money supply growth will slow too much.
"One must now fear that, given the current economic situation, money supply (growth) will fall below the ECB's target level and that it will be hard to turn this trend around," he said. The ECB's has set a 4.5% reference rate for M3 growth this year and many analysts expect M3 growth to fall below this rate in the coming months. Leibfritz argued that the recent upward trend in eurozone consumer prices (HICP) was only temporary and would turn around later this year.
"These are temporary price pressures that cannot be influenced by (ECB) rate policy. They will disappear on their own," the Ifo chief economist said.
"The ECB must concentrate on the core inflation rate -- and the core inflation rate is on target," he advised the central bank.
Leibfritz forecast that HICP would drop below the ECB's 2% price stability limit in the second half of the year. He also played down current high wage demands by trade unions in Germany and other eurozone countries "as the usual tough talking before the bargaining begins." He said he was convinced that actual wage settlements in the eurozone in the period ahead would be moderate. -