Differences in G-7 on interest rates

By Sridhar Krishnaswami

WASHINGTON, APRIL 30. Revealing signs of differences within the powerful Group of Seven of the industrialised world, Canada, Japan and France have called on the European Central Bank to lower interest rates; and there is a strong view in the G-7 that contrary to the perceptions of `sound' economic outlook, there is the need for some urgent action if the negative implications of the global slowdown are not to linger around longer.

The pressure on the ECB to cut interest rates could not have been more direct. ``Given the downside risks to the global economy, an easing in rates would prove helpful. Waiting too long to ease could prove too costly,'' the Canadian Finance Minister, Mr. Paul Martin, told the top policy panel of the International Monetary Fund.

Mr. Martin's observations were on the lines of concern expressed by his colleagues from France and Japan who did not seem to share the enthusiasm of the G-7 statement of Saturday that the economic outlook was ``sound''. Japan's new Finance Minister, Mr. Masajuro Shiokawa, said that he was ``concerned'' about growth in Europe and called for ``timely'' monetary measures, if necessary.

Even before the start of the spring meetings of the IMF and the World Bank, it was clear that the Europeans will come under sort of pressure to do ``something'' about interest rates. The argument has been that even if the rate of growth in Europe is slower, it was likely to grow faster than that of the American economy and therefore the need for the ECB to cut interest rates, something it has not done for sometime.

Prior to the start of the IMF meetings, the U.S. Treasury Secretary, Mr. Paul O'Neill, said that he was a little ``mystified'' about European policy makers' confidence that Europe would remain unaffected by the slowdown in the U.S. But the G-7 Ministers did not apply pressure as an entity on the ECB, something that has baffled some economic analysts here.

At least outwardly, the ECB is giving the impression that it is not in a big hurry; but the pressure is coming not just from the industrialised world but also from the big emerging markets like Brazil which has made the point that a cut in interest rates in Europe ``already appears necessary''.

But senior ECB officials attending the meetings here have tried to make the link, at least indirectly, between cutting rates and boosting inflation further. ``Our policy is forward looking. It is not absolutely necessary for inflation to fall below two per cent before we do something,'' the President of the Bundesbank, Mr. Ernst Welteke, has been quoted.

Meanwhile, the communique issued at the end of the one-day meeting of the International Monetary and Financial Committee has stressed the need for policy makers in the advanced economies to remain vigilant and forward looking. The key policy panel of the IMF, in welcoming the easing of monetary policy of the U.S., has argued that the Federal Reserve's policy ``should remain directed at restoring growth potential while maintaining price stability''.

The IMFC has also taken the position that the prospects for return to sustained growth in Japan depend most critically on determined action to address structural weaknesses especially in the financial and corporate sectors. As far as the Euro zone economies are concerned, the IMF panel has stressed the importance of a further deepening and acceleration of structural reforms for boosting longer term growth potential.

Stressing that strong and effective crisis prevention is a top priority, the IMFC has welcomed the Managing Director's decision to establish an International Capital Markets Department as part of an effort to deepen the Fund's understanding and judgment.

The committee has also called on the IMF ``to make progress with its work on early warning indicators of potential crisis in individual countries and in international financial markets, taking full account of the need to avoid instability''.

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Section  : International
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