STRASBOURG, July 3 - European Central Bank President Wim Duisenberg on Thursday put an end to hopes for early interest rate cuts, saying the central bank had done its part to boost growth and it was now up to governments. Duisenberg's sharp words provided a direct answer to German Chancellor Gerhard Schroeder who on Tuesday said the ECB "must answer the question of whether they have already done enough." "Governments can no longer hide behind the ECB to cover up their failure to enact the structural reforms that are so urgently required," Duisenberg told the European Parliament. The ECB's aggressive rate cuts over the past two years, which have brought interest rates to historical lows of 2.0 percent, make monetary policy appropriate and right, he said in a slap at politicians who have been calling for more monetary easing. Schroeder's appeal to the ECB came only days after he reached a tax cut deal that threatens to throw his country into budget problems with the European Union.
"Let me be crystal clear, the current monetary policy stance in the eyes of the Governing Council with interest rates at two percent is regarded as being appropriate in the light of the developments we foresee for the medium-term future," he said. "One can conclude that monetary policy has done its part to create the conditions for the resumption of economic growth," said Duisenberg, who is set to hand over the presidency of the ECB to Bank of France Governor Jean-Claude Trichet later this year. The ECB president's rebuke was seen by bond markets as a declaration the ECB's easing cycle may be over in a market already under pressure from growing optimism that the global economy may have turned a corner. "Bonds are selling off because Duisenberg is saying that the rates are at record lows and that there is not much more that monetary policy can do," said one euro debt trader. Two-year euro zone government debt yields shot to five-week highs and 10-year yields hit seven-week peaks on the remarks.
IT'S GOVERNMENTS' TURN
Euro zone governments needed to act more quickly to boost growth by pushing through reforms to labour and product markets, Duisenberg said. Reform would help overcome uncertainty of investors and consumers. "The situation of subdued economic growth and the stronger external value of the euro make structural reforms even more necessary," he said. Analysts said the comments were on target and a useful reminder not to shirk responsibility. "He is substantially right, and the ball is in the court of the governments," said Jonathan Hoffman, chief European economist at Royal Bank of Scotland Financial Markets in London. Duisenberg said the inflation outlook remained broadly unchanged since the ECB's last policy decision on June 5, when it cut its benchmark rate by half a percentage point to 2.0 percent.
He added the ECB would continue to carefully monitor economic developments affecting its stance but there was little else in his testimony to back economists' forecasts of lower borrowing costs later this year. A poll this week showed all 62 ECB-watchers surveyed expected no rate change when the ECB policy council meets next week. But most were still banking on a September cut, with 17 forecasting a 0.50 percentage point cut and 26 expecting a more modest 0.25 percentage point cut. Recent euro zone economic indicators have been mixed, with news of a sharpening contraction in the euro zone manufacturing sector in June offsetting stronger-than-expected rises in German and Italian business sentiment for the same month.
The contraction of the dominant services sector also appears to be coming to a halt with Eurozone services survey on Thursday showing a pickup in optimism and demand. ECB officials have said they are confident that after a weak first half, the euro area economy will recover gradually in the coming months and pick up steam in 2004. Duisenberg repeated the ECB's line that it did not expect persistently falling prices, known as deflation, either in Europe as a whole or in its constituent parts.//