27 January 2003, 11:51  Issing Rejects ECB `Activism' Amid Threat of War

Davos, Switzerland, Jan. 27 (Bloomberg) -- European Central Bank Chief Economist Otmar Issing opposed ``activist'' steps to spur the economy, playing down the chances of cuts in interest rates as the threat of a war with Iraq holds back growth. ``The important thing is that central banks contribute to strengthening overall confidence and that they don't start engaging in activist behavior,'' Issing said in an interview at the World Economic Forum. ``It would be counterproductive at the end of the day.'' Concern over a possible war is pushing up oil prices and curbing consumer spending and business investment, executives from Deutsche Lufthansa AG Chief Executive Officer Juergen Weber to Allianz AG Chief Financial Officer Paul Achleitner said in Davos. The ECB, which sets borrowing costs for the 12-nation euro economy, trimmed interest rates by half a point to 2.75 percent in December. Economic growth slid to a nine-year low of 0.8 percent in 2002, the European Union estimates.
European business confidence probably rose for the third time in four months in January, analysts said, a sign the interest-rate reduction may be starting to work. A confidence index to be released Friday will probably rise to minus 8 from minus 9, according to the median of 23 economists surveyed by Bloomberg News. ECB policy makers including Vice President Lucas Papademos and council member Guy Quaden have said the bank is prepared to respond to a further slowdown by reducing borrowing costs again. The 18- member rate-setting council next meets on Feb. 6.
Futures Prices
Investors expect another cut, interest rate futures trading shows. The rate on a three-month euro deposit maturing in June rose 3 basis points today to 2.48 percent at 8:35 a.m. Frankfurt time, compared with a three-month money market rate of 2.82 percent. A basis point is 0.01 percentage point. Issing said the bank is counting on subdued inflation to underpin the recovery. Energy and hotel costs helped lift the inflation rate to 2.3 percent in December. The EU predicts inflation will slip toward the ECB's 2 percent limit by June. ``To me, it seems premature to already write off 2003,'' Issing said. ``Our main scenario remains that inflation will continue to be restrained and that economic growth will recover in the course of the year after a moderate start.'' The European economy will return to what the ECB calls potential growth -- a rate of expansion between 2 percent and 2.5 percent -- by the end of year, the central bank predicts. The EU forecasts growth of 1.8 percent this year. ``This year, it's even more pointless than usual to focus on the average rate of growth because at the end of the day this is the result of a mathematical equation which is strongly influenced by the timing of an economic recovery,'' Issing said.
Oil Price Rises
Crude oil futures rose to $33.28 a barrel in New York on Friday, close to a two-year high, buoyed by concern the U.S. is preparing to attack Iraqi President Saddam Hussein. In discussions with business leaders and policy makers in Davos ``one can clearly feel that the risk of a war in Iraq is paralyzing investment and the overall sentiment,'' Issing said. ``This uncertainty is now casting a dark cloud over the economy.'' Benchmark stock indexes recorded a second week of declines. Issing rejected the idea that falling equity prices should prompt central banks to act. ``We all agree that central banks shouldn't have stock prices as a target,'' Issing said. ``It would lead to wrong behavior on behalf of investors and wrong expectations.''
Currencies
He declined to say whether he is concerned that the euro's surge against the dollar will make it more difficult for European companies to sell their goods overseas and hamper economic growth. Fellow ECB council member Ernst Welteke said in an interview yesterday that while the euro's current level isn't anything to worry about, ``the rapid rise must certainly not continue ad infinitum.'' The euro traded at $1.0833 at 8:32 a.m. Frankfurt time from $1.0826 late Friday in New York, where it rose to a 39-month high of $1.0855. In the past two months, the euro has gained 9 percent. ``We're watching the development,'' Issing said//www.quote.bloomberg.com

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