BERLIN, June 2 - European Central Bank President Wim Duisenberg said on Tuesday falling oil prices and the strong euro are lowering inflationary pressures, bolstering market expectations for an ECB interest rate cut this week. "Inflation pressures have declined significantly in recent months," Duisenberg told the International Monetary Conference in Berlin. His comments sent euro zone interest rate futures to a contract high, indicating expectations of a rate cut on Thursday, and two-year bond yields hit a record low of 1.98 percent before rebounding.
Duisenberg said wage pressures are easing, sharp euro appreciation is bringing down import prices and consumer price growth should fall even more next year -- all signals that the ECB has room to lower interest rates to support tentative recovery. "We expect that, after hovering around two percent over the coming months, consumer price inflation should fall more significantly in 2004," he said. Investec chief economist Philip Shaw said "Duisenberg put more emphasis on a significant fall in inflation and that adds up to rates coming down on Thursday". In later remarks, Bundesbank President Ernst Welteke maintained the disinflationary tone, saying Germany might experience a period of mild, although not pernicious, deflation.
Welteke said Germany, recently warned by the International Monetary Fund of the dangers of tipping into deflation which would discourage consumers and crimp output, said at present his country was merely experiencing disinflation. "We cannot however completely rule out the possibility that Germany might experience a period of mild deflation in the near future, the combination of a deep confidence crisis, the appreciation of the euro and the negative wage risks are behind that risk," he said "It is highly unlikely that Germany will experience pernicious deflation," he added. He said that unlike Japan, where deflation has taken hold, Germany had never experienced a real estate price bubble, banks were purging their loan portfolios, basnking supervisors were on the alert and German was "accommodating structural change".
Duisenberg said the pace of European growth -- stalled by war worries, corporate debt restructuring and rising oil prices -- should pick up. "We expect some acceleration in the second half and even more thereafter," he said. He said the economic indicators have still been sending very mixed signals in recent months, complicating the task of the central bank in deciding the direction of growth and strength of any recovery. Moreover, interest rates currently are at low levels, enough to support a recovery in business investment and help the consumer, the ECB bank president said.
Markets expect a heated debate is in store at the ECB's policy meeting on Thursday over whether the euro zone economy needs a jolt from a half percentage point rate to keep recovery firmly on track, or if the ECB will settle for a quarter percentage point cut until the path ahead is clearer. Duisenberg also used his opening remarks at the central bankers panel to scold some euro zone finance ministers for failing to keep their budget deficits under control. "There cannot be any scope for active coordination of fiscal and monetary policy," Duisenberg said, adding that he just came from a fight with European finance ministers on fiscal discipline at the Eurogroup meeting on Monday. Bank of France governor Jean-Claude Trichet said at the same event that the euro zone needed credible medium-term strategies to boost confidence, the key to economic growth//