FRANKFURT, Feb 11 - There is no need to alter euro zone interest rates now, despite the strong euro, European Central Bank Executive Board member Gertrude Tumpel-Gugerell said on Tuesday. The ECB's December economic forecast for a gradual recovery was not in jeopardy because of the currency's strength and falling inflation remained broadly unchanged, she said, adding interest rates were appropriate. Tumpel-Gugerell declined to elaborate on the wording of this weekend's statement on foreign exchange by the Group of Seven. "No comment", she told journalists when asked to specify what the G7 richest nations had meant by "disorderly" exchange rate movements, described as undesirable, in a statement made this weekend at their meeting in Boca Raton, Florida. But policymakers did have a rough idea in mind when using the word. "Obviously one has an image of how foreign exchange developments should relate to fundamental data," Tumpel-Gugerell told journalists at the Frankfurt ICFW press club in remarks embargoed for release until Wednesday.
Asked to repeat her earlier statement that lowering borrowing costs was not an issue now, Tumpel-Gugerell said: "I have said a rate cut is not an issue, or (also) a rate change is not currently an issue." The ECB should watch whether its outlook for gradually declining inflation came true, before it considered any further rate steps, Tumpel-Gugerell said: "The inflation trend that we are currently looking for should first come true." Some have suggested that the ECB might lower rates to offset the euro's rise as the tool of currency market intervention seems unlikely to succeed, given a lack of U.S. support. So far, the ECB has given no hints it may use either of the two. Economists in a poll on Monday saw only a slim chance of an ECB rate cut to rein in the euro strength, with mid-range forecasts putting the odds of an easing this year at just 25 percent, and seeing rates unchanged until end 2004. They said only rapid euro appreciation towards levels around $1.35 could force the ECB to bring rates below their current record low of 2.00 percent. The euro has hovered around $1.27 ever since this weekend's G7 statement. That is some eight percent over the $1.17 level the ECB assumed the euro would stay at when it made its December economic projections, or four percent in trade-weighted terms.
OUTLOOK BROADLY UNCHANGED
But despite the strong euro, there was no reason to change the growth and inflation outlook, Tumpel-Gugerell said. The ECB expects inflation to average 1.8 percent this year, in line with its target to keep consumer price rises below, but close to two percent. The risks to that outlook had not changed since the ECB last made its economic forecasts, she said. The outlook for growth also had not changed since December, because stronger global demand offset the euro's dampening effect on exports. The ECB sees the euro zone growing by 1.6 percent this year. There were now solid signs the euro zone had started recovering, though consumption still remained sluggish. This was nothing unusual in the current phase of recovery, but more consumer confidence would be welcome, Tumpel-Gugerell said. "In the medium-term, fundamental factors should dominate: low interest rates and favourable financing conditions... The conditions for recovery of domestic demand in the course of this year are there."//