By Alan Beattie and Stephen Fidler in Washington and Tony Barber in Frankfurt // The International Monetary Fund weighed into a controversy over European interest rates on Thursdayas itschief economist called a rate cut long overdue.
But as expected, the ECB's policymaking council on Thursday defied international pressure and kept its maininterest rate unchanged at 4.75 per cent.
With concern growing about a slowdown in the world economy, ahead of a weekend meeting of senior financeofficials from the Group of Seven leading economies, Michael Mussa, the IMF's chief economist, saidthe casefor an ECB rate cut to help boost the international economy was "unambiguous". The bank should havecut ratesa month ago. "The euro area needs to become part of the solution, rather than part of the problem,of slowingglobal growth," Mr Mussa said.
Meanwhile, in an FT interview, Horst Kцhler, IMF managing director, rejected the view expressed by someEuropean officials that Europe was insulated from a US slowdown. "It's just no longer possible to say we don'tcare or there is no linkage. Globalisation means everything is interconnected," he said.
He said that, although trade with the US accounted for about 2 per cent of European economic activity, linkagesthrough financial markets and companies with US interests would amplify the impact of a US downturn.
Europe would also be affected by the slowdown in Asia, exports to which accounted for 12 per cent of grossdomestic product. IMF forecasts released on Thursday showed weak growth expectations for the threebigregions of the world economy - and the risks were on the downside, said Mr Kцhler. "No region [is] taking up theslack. That's my concern."
Speaking at the launch of the IMF's twice-yearly economic outlook, which forecast world growth slowing to 3.2per cent this year from 4.8 per cent last, Mr Mussa said domestic demand in the euro-zone was stillrunningbehind the overall economy. This meant that the zone was sub-tracting from global economic growth.
While the European authorities could not make up entirely for slow growth in Japan and the US, Mr Mussa said,the ECB could still make a substantial difference.
However, European economists said an unexpectedly sharp rise in annual German inflation to 2.9 per cent thismonth from 2.5 per cent in March underlined that the ECB had some grounds for its cautious stance. Pricepressures have also risen this month in Italy, which together with Germany accounts for half the euro-zoneeconomy.
But Mr Kцhler said that despite the increase in headline inflation in Germany and Italy, underlyinginflationremained under control. Wim Duisenberg, the ECB president, and his colleagues are expected to remind the USand other partners at the G7 that the ECB's primary task, enshrined in law, is to control inflation.
Annual euro-zone inflation has been above the ECB's target ceiling of 2 per cent for a year.