Merkel jockeys for position on rate cut debate

GERMAN Chancellor Angela Merkel broke ranks yesterday to deliver an outspoken critique of European Central Bank interest rate policy, hinting rates would have to increase if policymakers looked at Germany alone.

The comments, which are out of keeping with the traditional neutrality of German leaders on monetary policy, come ahead of an expected cut in interest rates from the ECB next week.

Merkel said: “The ECB is obviously in a difficult position. For Germany it would actually have to raise rates slightly at the moment, but for other countries it would have to do even more for more liquidity to be made available and especially for liquidity to reach corporate financing.”

She added: “If we want to get back to a bearable interest rate level, then we have to get over this internal division of the Eurozone.”

The ECB sets rates for the whole of the 17-state bloc rather than by individual country, which has helped foster debate about how interest rates should be set.

The Bank may be driven to cut rates after official figures released yesterday revealed the parlous state of labour markets across European economies

More than a quarter of Spain’s labour force is now out of work, while youth unemployment numbers also continued climbing in France.

Spanish unemployment rose to 27.2 per cent with more than 6m people out of work in the first quarter of the year, a record high.

And French youth unemployment hit a new high of 27.7 per cent.

The gloomy employment numbers come after a week of weak figures with private sector surveys pointing to a downturn even in Germany.

“As the Eurozone recession deepens, the downturn in Germany accelerates, credit conditions remain tight and inflation is falling, the European Central Bank is under growing pressure to take action,” said economist Tomas Holinka from Moody’s Analytics.

“We expect the ECB to cut its policy rate by 0.25 percentage points to 0.5 per cent next week.”