November 8, 2001	Thursday	Shaba’an 21, 1422

FRANKFURT, Nov 7: Monetary and fiscal policy makers cannot smooth out the peaks and troughs of economic cycles, Bundesbank President Ernst Welteke said on Wednesday, on the eve of a key interest-setting meeting of the European Central Bank.

Monetary and fiscal policy, no matter how perfect they are, cannot prevent the necessary economic adjustments nor the ups and downs of the economic cycle, Welteke said in a speech prepared for delivery at a banking congress here.

As head of the German central bank, Welteke sits on the ECB’s governing council, the body responsible for setting euro-zone interest rates next scheduled to meet on Thursday.

A copy of the speech was made available by the Bundesbank.

Nevertheless, governments could play help nurture growth and employment by pursuing the necessary structural reforms, Welteke suggested.

Lively competition, flexible markets and just the right level of incentives can make the process of economic adjustment easier, the Bundesbank chief argued.

Europe has plenty of room for manoeuvre in this respect, even — or perhaps precisely in times of sluggish growth and tight finances.

Welteke acknowledgd that the global economy was not only traversing a period of marked weakness, but also a period of marked uncertainty.

For the first time since the oil crisis in the mid-1970s, the Group of Seven (G7) countries are experiencing a simultaneous weakening of growth, Welteke said.

Almost all confidence indicators for the euro area are pointing to a further slowdown in economic activity.

Nevertheless, sentiment is worse than the actual situation, he added.

Expectations are more volatile than real economic developments and do not necessarily turn out to be correct, the Bundesbank chief said.

All the arguments for a cut in euro-zone interest rates currently appear to be in place, with inflation slowing and the European economy lurching alarmingly closer to recession.

But even though Europe’s economic fate appears to be hanging in the balance, a rate cut this week by the European Central Bank is still anything but a safe bet, analysts here said on Wednesday.

Market consensus appears to believe the ECB will cut its central “refi” refinancing rate from 3.75pc at present.

That is the level at which the refi has been since the half-point reduction on September 17, a surprise move aimed at repairing some of the damage wrought by the terror attacks in the United States the week before.

Out of 34 economists polled by AFP and its financial news subsidiary AFX, all but one predicted a cut in euro-zone interest rates when the ECB holds its regular fortnightly policy-setting session on Thursday.

Even the financial markets appear to believe a move is on the cards — in the ECB’s regular refinancing operations on Tuesday, euro-zone banks bid for liquidity at the lowest possible level so as not to be caught out if the ECB lowered borrowing costs on Thursday.—AFP