7 November 2001, 15:10 Buba's Welteke says yet to see full impact of this yr's rate cuts
FRANKFURT (FWN) - Bundesbank president Ernst Welteke said the effects of
interest rate cuts made so far this year by the European Central Bank have
partly not yet appeared.
In a prepared speech before a meeting on credit policies, Welteke also said
monetary and fiscal policies cannot prevent adjustments in the economy nor the
ups and downs of the economic cycle.
Welteke said Europe can be "cautiously optimistic" about the economy as the
euro zone's stability-oriented monetary and fiscal policies in the past years
make it easier to overcome economic crisis.
"The world economy right now is not only in a phase of marked weakness but
also in a phase of pronounced insecurity. The attacks in New York and
Washington have increased this insecurity," he said.
"The extent and the regional focus of the military conflicts as well as
further anthrax attacks could decisively influence confidence of companies and
consumers," he added.
He said Europe is experiencing a "supply and demand shock", which has
resulted in economic costs due to the need to adjustments in capacity.
"The result is a temporary low economic growth," he said.
He said the data of the financial markets also give reason for "cautious
optimism on the medium term".
He said real interest rates have declined since mid-2000, and the spread in
borrowings made by companies have slightly declined, and the share prices
indicate the first signs of bottoming out.
"The financing conditions of private households and the economy have not
yet improved so strongly as one can expect for interest rates that were cut 100
basis points. The levels for credits for consumers, demand deposits and company
loans up to now have only fallen slightly," he noted.
"This is mainly due to the current risk situations on the markets," he
said.
"With increasing time intervals, the markets will feel more secure in
assessments and the risk spreads will decrease. This is also the reason why the
effect of this year's interest rate cuts have partly not yet appeared," he
said.
He said monetary and fiscal policies cannot prevent "necessary adjustments
nor the ups and downs of economic cycles".
"But lively competition, flexible markets and incentives that are correctly
given can make the necessary adjustment processes easier. On this area, there
exists in Europe sufficient room for maneuver -- even now in times of
restrained growth and tight budget," he added.
He said stability-oriented monetary and financial policies in thepast years
has made it easier to overcome crises and low inflation has in turn led to
lower net financial investments in the public sector.
"This has won room for maneuver, which should not be squandered away. The
room for maneuver in the major countries in the euro zone is nevertheless
limited," he said.
Welteke said the latest published indicators of public mood in the euro
zone indicate "almost completely a further weakness in the eocnomic activities" but
noted that "the mood is worse than the actual situation".
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