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France Says September ECB Rate Rise Not Done Deal

France on Friday kept up pressure on the European Central Bank to take account of global financial market turmoil and economic growth when setting interest rates, and said a September rate rise was not a done deal.

President Nicolas Sarkozy was quoted by a government spokesman after a cabinet meeting as saying: "Can we deprive ourselves of the rate weapon in the face of a crisis like the current one?"

Separately, Economy Minister Christine Lagarde said she hoped the ECB would take the needs of European economies into account when it next decides rates on Sept. 6, and said an ECB increase was not guaranteed at this meeting.

"One should not consider that the European Central Bank has raised its interest rate," she told reporters on the sidelines of a press conference. "It is a decision that will be taken in due course on Sept. 6 in light of macroeconomic elements and in light of the monetary policy it intends to implement."

The comments come at a time when some in financial markets have begun to believe that the ECB may intend to raise interest rates from 4.0% in September despite recent sharp falls in share prices and tightening credit conditions.

Such speculation was sparked after the ECB reminded markets on Wednesday of the monetary policy stance it had taken on Aug. 2, before the most recent bout of financial market turmoil.

Lagarde sought to show that Paris was not seeking to challenge the ECB's fiercely-defended independence but pointed out that euro zone inflation, which the ECB is mandated to keep in check, currently posed no problems.

"It (the ECB) will do so in all independence and I hope with due consideration to the needs of our European economies and in particular the economies of the euro zone, where I note that inflation is well under control," she told reporters.

Humorous Fed-Watching

More pointedly, government spokesman Laurent Wauquiez said Sarkozy had made a reference to the U.S. Federal Reserve, which on Aug. 17 cut the discount rate that governs Fed loans to banks by a half-percentage point to 5.75%.

"The president, with a touch of humour, underlined, 'I am not an economist but I see what has happened. The Fed had an interesting reaction with a 0.5 point cut, a reduction in rates which is exactly the opposite of a certain economic thinking, of an economic theory which is a bit rigid'," Wauquiez said.

Still, Paris was keen to send a reassuring message as far as French growth was concerned, particularly after second quarter economic activity turned out to be weaker-than-expected.

"Growth in the third and fourth quarters will be clearly better," Lagarde told the press conference, adding that she hoped for growth of more than 0.5-0.6% in each quarter.

She said such hopes were based on generally favourable forecasts for world growth, healthy domestic consumption, and expectations that a huge package of tax cuts voted by parliament would support economic activity from the fourth quarter.

Lagarde also played down the risks to the French banking system from exposure to subprime loans: "French banks are not very exposed to sub-prime risks. The banking sector situation is completely healthy."

But she made it clear the government would not leave matters to chance and said she and Prime Minister Francois Fillon would next week meet representatives of domestic and foreign banks operating in France to discuss lending and credit conditions.

Lagarde also said Group of Seven leading industrial nations would discuss ways to improve financial market transparency and governance, echoing a call Sarkozy has already made to German Chancellor Angela Merkel.

Contact Europe: Economy

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