The International Monetary Fund last night stepped up the pressure on the European Central Bank to cut interest rates after warning that a failure to boost growth prospects in the single currency zone was adding to the plight of a weakening global economy.
As the ECB announced in Frankfurt that borrowing costs would remain unchanged at 4.75%, the IMF's chief economist, Michael Mussa, said: "The euro area needs to be part of the solution rather than part of the problem of slowing global growth."
Mr Mussa's explicit criticism sets the scene for a tense meeting of finance ministers and central bank governors of the Group of Seven industrial nations on Saturday, when Wim Duisenberg, the ECB's president, will be unrepentant about the bank's policy stance.
Financial analysts said yesterday that the rise in German inflation to its highest for seven years meant there was little chance of a cut in eurozone rates until June, with the ECB concerned that its credibility would be seriously damaged if it cut rates at a time when inflation was rising.
Mr Mussa added that there had been a case for a cut in eurozone rates for the past month, and that the ECB should give more heed to the needs of the world economy than to domestic inflation. "From the global perspective, the case for easing is unambiguous", he said at a press conference in Washington to publish the IMF's half-yearly World Economic Outlook.
The report praised central banks - including the US Federal Reserve and the Bank of England - for taking early action to prevent the slowdown in the global economy from turning into a full-scale recession, but Mr Mussa made it clear that patience with the ECB was wearing thin.
He said Europe's overall growth rate was faster than the growth of domestic demand in the 12-nation monetary union zone, leading to lower growth in the rest of the world. "It should be doing better than that".
The IMF believes that infla tion pressures in Europe are on the wane.
Just before the ECB's "rates unchanged" announcement, Germany reported a surge in April inflation to a seven-year high of 2.8% from 2.5% in March, largely on stubbornly high food and fuel costs.
The figures followed data from Germany and Italy this week showing that food scares relating to mad cow and foot and mouth diseases are driving eurozone inflation further above the ECB's ceiling.
German producer prices, a key indicator of future consumer inflation, hit a 19-year high of 4.9% in March. Two-year bond prices slipped immediately after the ECB announcement, with the yield rising 1.8 basis points to 4.484%. The 10-year bund future held steady, however. "They're [the ECB] not going to be frightened into making any early rate cut," said David Brown, an economist at Bear Stearns in London.
The IMF said supported the two cuts in interest rates this year from the Bank of England, adding that with inflation subdued there was room for further easing if "the growth outlook were to deteriorate further". It shaved its forecast for UK growth this year from 2.8% to 2.6%, noting that the UK was more vulnerable than the eurozone to external events.
