No economists are expecting the European Central Bank to raise its key interest rates this week so soon after the moderate monetary tightening at the end of August.
However, at the news conference scheduled after the ECB's regular fortnightly policy-making meeting on Thursday, president Wim Duisenberg is expected to face some tough questioning about what the bank plans to do to help prop up the ailing euro on the foreign exchange markets.
Out of 30 economists polled by AFP and its subsidiary AFX, none said that they were expecting the ECB to announce any further moves in euro-zone interest rates this week following the quarter-point increase in the bank's key refinancing rate — to 4.50 percent from 4.25 percent — on August 31.
Even the latest sell-off in the euro, which brought the single currency down to new historic lows against the dollar on Monday, will be no argument for the bank to raise rates further, economists here argued.
Recent rate increases — the ECB has raised its key rates by a whole two percentage points since last November — have done little to curb the current slide in the euro.
And additional monetary tightening might harm the euro further by putting the brakes on growth in the 11-country euro zone, economists suggested.
Nevertheless, president Duisenberg will have to come up with something more convincing than the usual litany of pro-euro comments if the markets are to be persuaded to end their speculative attack against the 21-month-old currency, economists here said.
The issue of possible direct intervention will probably be foremost in people's minds.
A meeting of EU finance ministers in Versailles, France, on Friday, brought rather pale threats from ministers and ECB deputy president Christian Noyer that intervention was a tool which the central bank could resort to at any time, comments which duly failed to impress the markets.
The ECB is empowered to intervene unilaterally on the foreign exchange markets on behalf of the euro at any time.
And with the euro falling below $0.86 for the first time on Monday, the question of intervention was becoming increasingly pertinent.
However, intervention is seen as a two-edged sword with no sure guarantee of success.
The timing of any such action is crucial, because even a central bank as powerful as the ECB would have not enough funds at its disposal to act against the markets.
It would therefore be more effective to await a slight upturn before buying the euro thereby giving added momentum to the upward trend.
Many observers argue that failed intervention would undermine the ECB — and consequently the euro — even further.
But others suggest that intervention is only futile if the slide in a currency were due to a fundamental shift in expectations regarding future productivity, inflation, growth or economic policy. And that was not the case with the euro at the moment.
Furthermore, intervention would show that the ECB cares about the value of the euro and it would show speculators that they would no longer win when betting against the new currency, supporters of intervention argue.
More effective than unilateral intervention would of course be concerted action with participation by the US Federal Reserve and the Bank of Japan.
But the US would not be expected to take part in such action in view of the current presidential elections and the fact that the strong dollar could prove convenient for the US Federal Reserve, since it constitutes a tightening in monetary policy.— (AFP)
© Agence France Presse 2000
© 2000 Mena Report (www.menareport.com)
