ECB to review rate-setting procedures

The European Central Bank is to embark on a "serious evaluation" of its monetary policy over the next six months to assess the way it has been setting interest rates in the first four years of the single currency.

Among the areas under the microscope will be its inflation target, which sets an upper limit of 2% for increases in the cost of living for the 12-nation eurozone, sources at the ECB said yesterday.

They added that the review is expected to be completed by the time the ECB's president, Wim Duisenberg, steps down next July.

The ECB has been under fire during the slowdown for being too inflexible in its attitude towards monetary policy, which is designed to ensure the price stability laid down in the bank's mandate.

The sources said that policy change was not inevitable - for example, copying the Bank of England's symmetrical inflation target, whereby inflation must be kept within one percentage point of 2.5%, and an undershoot is treated as seriously as an overshoot.

The ECB is also unlikely to abandon its "two-pillar" approach to monetary policy, whereby both the state of the monetary aggregates and a range of factors including growth and the exchange rate are taken into account when interest rates are set.

This month, the ECB cut rates to 2.75%, its first reduction for 13 months, after signs that the renewed slowdown in the global economy had taken its toll of the European economy, particularly the biggest country, Germany.

The bank has been criticised for being too slow to respond to what was happening to the global economy, but other observers have noted that inflation has been stubbornly stuck above the ECB's ceiling.

It has also faced the problem of trying to set a single interest rate for 12 countries with different growth and inflation rates.

Sources within the ECB say that there is a limit on what can be achieved through monetary policy and responsibility for higher growth in the longer term depends on the willingness of national governments to embrace wide-ranging structural reforms.