Deflation concerns to drive further rate cuts
ECB ‘will have to act’ if inflation falls far below 2pc
In the past three months the ECB has cut rates three times. JOHN MACDOUGALL/AFP/Getty Images
Monday December 22 2008
European Central Bank governing council member Miguel Angel Fernandez Ordonez has said the bank would cut rates if inflation expectations were significantly less than 2pc.
"If, among other variables, we observe that inflation expectations are going to go well below 2pc, the logical thing would be for us to cut interest rates," Mr Ordonez was quoted in Spanish newspaper 'El Pais' over the weekend.
In the past three months, the ECB has cut rates three times to take them from 4.25pc to 2.5pc. This was made up of two 0.5pc cuts, and then a record 0.75pc cut earlier this month. The three rate cuts represent the most aggressive reduction in the ECB's 10-year history.
Mr Ordonez said if the eurozone had "expectations of deep deflation" like the US, he would recommend following the same policy as the Federal Reserve.
The Fed shocked the markets last week by slashing rates to between zero and 0.25pc in a bid to lift the world's largest economy out of deepening recession.
The ECB's overriding objective is to maintain price stability, rather than boost the eurozone economy.
A plunge in energy and food prices slowed eurozone inflation in November to just above the European Central Bank's 2pc target.
Consumer prices in the 15-country area fell 0.5pc month-on-month for a 2.1pc year-on-year rise, according to statistics out last week.
Mr Ordonez said, however, that the ECB was right to raise rates in July.
This occurred at a time when monetary authorities across the globe were fighting inflation -- with oil prices alone peaking at a record $147 a barrel that month.
The price of crude oil has since plunged below $40 a barrel-- the lowest level since 2004.
Meanwhile, fellow ECB board member, Lorenzo Bini Smaghi, said the financial markets were showing signs of "slowly being put in order".
Volatility
"Measures adopted by governments and central banks are starting to produce effects," Mr Bini Smaghi told Italian paper 'Il Messaggero' in an interview.
Still, there continues to be "much" volatility in the markets and 2009 "will mark a year of deterioration of the real economy, which will contract", he said.
Banks should increase their capital reserves above "prudent requisites," accept state contributions and are in a "good position" to start financing the real economy, Mr Bini Smaghi told the newspaper.
He also defended the ECB's interest-rate increase in July even as other central banks were cutting the cost of borrowing, saying it had helped to reduce inflation. (Additional reporting, Bloomberg and Reuters)
- Joe Brennan
