Frankfurt, May 8 (Bloomberg) -- The European Central Bank eased its policy of trying to restrict inflation to 2 percent, signaling it may act more quickly to cut interest rates to buoy an economy that is on the brink of recession. Reviewing its monetary strategy for the first time, the five- year-old bank that sets interest rates for the dozen nations sharing the euro took a step away from the tight anti-inflation policies it inherited from Germany's Bundesbank. With the economy posting little or no growth and unemployment at a three-year high of 8.7 percent, President Wim Duisenberg said the central bank will now aim for inflation ``close to 2 percent'' and is on guard against deflation.
``This clarification underlines the ECB's commitment to provide a sufficient safety margin to guard against the risks of deflation,'' Duisenberg told a news conference after the bank left its main interest rate at 2.5 percent. The ECB has cut rates six times since the start of 2001, half as often as the U.S. Federal Reserve, and drawn criticism from politicians, including German Chancellor Gerhard Schroeder, and companies such as Siemens AG for letting growth slide. Inflation, at 2.1 percent in April, has been at or above the 2 percent limit for 29 of the last 31 months. The ECB has cut interest rates six times over that period, from 4.75 percent in October 2000 to 2.5 percent.
Bundesbank Heritage
Under European Union treaties, the bank's primary job is to fight inflation. It inherited that priority from the Bundesbank, which Germany built in the 1950s to prevent a repeat of the bouts of hyperinflation after the two world wars. Today's changes are ``a slight easing of their position,'' said Karsten Junius, an economist at Dekabank in Frankfurt and the co-author of a 2001 book on the ECB. ``It looks like they have raised their inflation target.'' The ECB's mandate differs from the U.S. Federal Reserve, which is also charged with promoting employment. The ECB was also given the latitude to set its own inflation target, unlike the 2.5 percent target set for the Bank of England by the U.K. government.
Growth in the $8 trillion euro economy, the world's second largest after the U.S., slid to a nine-year low of 0.9 percent in 2002. The economy may have contracted in the first quarter, the EU's executive branch estimates. Today's strategy document highlighted the risk of deflation, a word not used in the ECB's first strategy paper in October 1998. ECB Chief Economist Otmar Issing, who held the same post at the Bundesbank from 1990 to 1998, said in March that central banks may have to accept inflation rates that deviate from their own limits during times of economic and financial turmoil. ``This `close to 2 percent' is not a change -- it's a clarification,'' Issing said today. ECB council member Yves Mersch spoke in an interview last month of adding an element of ``symmetry'' to the bank's inflation definition, suggesting it would let the rate stray above or below a central goal.
Money Supply
The bank will no longer perform an annual review of its target for the money supply, a measure of cash and short-term bank deposits that it uses as a guide to future inflation. Money-supply growth has topped the bank's 4.5 percent reference value for the past 22 months. Backing away from the ``prominent role'' the bank gave to the money supply when it took charge of the euro, the ECB today said it will use the money supply ``to assess medium to long-term trends in inflation.'' Duisenberg's post-meeting press conferences will further downgrade the money supply by starting with an assessment of the economic situation and then ``cross checking'' it against monetary developments.//www.bloomberg.com