3 October 2002, 09:04  ECB's Vanhala Says Interest Rates Are Low Enough to Fuel Growth

By Rainer Buergin and Juho Erkheikki
Helsinki, Oct. 2 (Bloomberg) -- European Central Bank council member Matti Vanhala said interest rates are low enough to fuel growth in the dozen-nation euro economy, suggesting the bank won't pare borrowing costs in the coming weeks.
``Nobody in the industrial sector or the producing sector complains about the level of interest rates,'' Vanhala said in an interview. ``Monetary conditions have become extremely accommodative.''
Vanhala's comments may prompt investors to scale back expectations for a reduction in borrowing costs. Interest rate futures prices show that most are expecting the ECB to pare borrowing costs before the first quarter of next year, to bolster confidence as Europe's economic recovery falters.
The European Commission said last week growth in the region will slip below 1 percent this year, the slowest pace since 1993. World stock markets are tumbling, hurt by weak demand for goods and services, accounting scandals and a possible war in Iraq.
Major U.S. and European stock indexes Monday ended their worst quarter since 1987. Europe's Dow Jones Stoxx 50 Index has dropped more than a third since the start of the year.
``Market participants are overwhelmed by the data that have flowed in the last two or three months and are disappointed that the signs of a rapid recovery that we saw in the first quarter were misleading,'' Vanhala said.
The ECB left interest rates unchanged at its most recent monetary policy meeting on Sept. 12. It last lowered its benchmark refinancing rate by a half point to 3.25 percent on Nov. 8. It next meets to set interest rates on Oct. 10.
Declining Confidence
The implied yield on three-month Euribor contract due in March 2003 is 2.86 percent, compared with a money-market rate of 3.28 percent and the ECB's main lending rate of 3.25 percent. A basis point is 0.01 percentage point.
Consumers and executives are becoming more pessimistic about the economy. French consumer confidence fell in September, matching April's four-year low, amid concerns unemployment may continue to rise. German business confidence sank for a fourth straight month to an eight-month low, the Ifo institute said.
``Maybe we are sort of crawling along the bottom right now and gradually easing upwards,'' Vanhala said. ``The most plausible forecast is one of gradually increasing growth rates. It's one of recovery.''
Inflation in the 12 euro nations accelerated to a five-month high of 2.2 percent in September as energy and food prices climbed. The bank lowered interest rates just four times last year, by 1.5 percentage points, because inflation exceeded its 2 percent limit. The U.S. Federal Reserve pared rates 11 times and the Bank of England reduced them seven times.
``This September figure for the euro area is a disappointment,'' Vanhala said. ``At the same time we know that there is an oil price effect'' and that the increase wasn't ``euro area-generated inflation.''

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