More rate cuts on the cards as ECB sticks to it guns
The ECB has been busy pumping billions into the system to increase liquidity. Photo: JOHN MACDOUGALL/AFP/Getty Images
Thursday October 23 2008
The European Central Bank's (ECB) recent strategy of interest rate cuts looks set to continue, ECB executive board member Jose Manuel Gonzalez-Paramo, has told the Irish Independent.
As the global financial crisis continues, the ECB's shift from a focus on inflationary pressures to supporting the European economy will facilitate more rate cuts.
"We have not changed our primary mandate which is the stability of prices in the medium term," he said.
"However, what we have and this is possibly a new element of our analysis, is a confirmation of a slowdown in growth and a deterioration in the outlook for growth in the Euro area and globally, which means the pressure on inflation will be lower, and this, together with the lowering of commodity prices, is explaining that we are in a position to diminish rates without adding to inflationary risks in the medium term."
The euro fell below $1.28 for the first time since November 2006, on growing speculation the ECB will cut rates to limit a global economic slowdown. The currency reached as low as $1.2743. It dropped to 126.29 yen, the lowest since April 2004.
Mr Paramo added that the decision in July to raise interest rates and curb inflation led the ECB to be able to change its tack earlier this month by cutting interest rates from 4.25pc to 3.75pc. "We are free to decide in any direction and always decide on the basis of facts and figures and new information," he said.
Against the backdrop of these changes is the credit crunch, a global slowdown and capital market turmoil, and the ECB has been busy pumping billions into the system to increase liquidity, especially in the beleaguered banking sector.
Smoothly
"In stressful times, like what we are going through now, we try as much as possible to keep the money markets functioning smoothly."
While the 11 banks covered by the scheme here are going through the deeds process of the €500bn scheme, the Irish answer has been criticised for not going far enough in relation to capital issues.
But Mr Paramo wouldn't be drawn on individual schemes. "This is for the financial regulator to decide," he said. "I understand from recent comments from the Financial Regulator that the capital rate in Irish banking institutions is around 11pc. I know that the authorities are now analysing the situation very carefully. If a case were to be made that the Irish banks need capital, I'm sure the authorities would deliver.
"From what I understand, the Irish authorities reacted first for well-known reasons. Following the so-called Paris summit, it is understood that the Irish scheme is compliant with the general approach. I will not qualify whether it is better or worse."
He added that regulators have failed to the extent that they haven't taken into account incentives properly. However, he believes that heads should role if bad decisions were made within institutions.
"Investors that have been wrong should not be bailed out. Whatever that implies at the level of the country is a matter of judgement."
- Ailish O'Hora Business News Editor
