April 27, 2008 / 6:48 PM / in 11 years

UPDATE 1-Gap between Fed, ECB rates too big-France's Lagarde

(Adds quotes, Jouyet comments, details, background, byline)

By Francois Murphy

PARIS, April 27 (Reuters) - French Economy Minister Christine Lagarde said on Sunday the difference between U.S. and euro zone interest rates was too big and called for a change in rate policy on one side of the Atlantic or the other.

With euro zone inflation at 3.6 percent, its highest since measurements for the bloc began in 1997, the European Central Bank has left its key refinancing interest rate unchanged at 4.0 percent despite signs euro zone growth is slowing.

In the meantime, the U.S. Federal Reserve has aggressively slashed its interest rates again and again, bringing its target fed funds rate down to 2.25 percent.

“We are in a delicate situation where we have, on the one hand, an American Federal (Reserve) which has a policy of very low rates and a European Central Bank which has maintained high interest rates,” Lagarde told LCI television and RTL radio.

“The differential in interest between the two, it seems to me, is a little too big at the moment,” she added.

Asked what needed to be done, Lagarde said: “Either have a slightly more flexible rate policy at the European level or have a slightly different American rate policy. It is the gap between the two that is currently a problem.”

Paris has long been a vocal critic of what President Nicolas Sarkozy has termed the ECB’s overly narrow focus on fighting inflation — and has previously come in for criticism from Germany for meddling in the independent central bank’s business.

But an extended rise that saw the euro scale record peaks above $1.60 EUR= last week prompted France's junior minister for trade and Germany's economy minister to say the ECB should take the strong euro into account when setting monetary policy.

On Sunday, France’s junior minister for European affairs, Jean-Pierre Jouyet, stepped into the ring by saying the ECB should also look at growth.

“It is up to it (the ECB) to decide between growth and inflation,” Jouyet told BFM television and radio.

“One must also take into account the elements that will exist in terms of growth and the estimates that are made for the euro zone,” he added.

Asked how Sarkozy’s relations with ECB chief Jean-Claude Trichet would evolve during France’s presidency of the European Union in the second half of this year, Jouyet said Sarkozy’s views were gaining ground, without specifying what they were.

“Nicolas Sarkozy will maintain his points of view. All the more so because having been isolated at the beginning, he is more and more supported in his positions, notably regarding exchange rates,” Jouyet said.

“There is today no dissent in Europe in believing that we have increases that are too fast in the euro, that we have to be careful and that we have to reinforce international cooperation in that area,” he added.

Lagarde also reiterated Sarkozy’s pledge to balance France’s budget by 2012.

“We will make all efforts to do that,” she said. (Additional reporting by Gerard Bon, editing by Maureen Bavdek)

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