ECB has room to cut lending rates
Thursday, 24 April 2008

The European Central Bank has room to cut its main lending rate later this year, a director of the International Monetary Fund said Monday, reports AFP.

“We don’t say cut now,” tempered Michael Deppler during a press conference at the ECB’s headquarters that coincided with the release of a report on the consequences of the financial crisis in Europe.

Inflation which is “uncomfortably high” at the moment should ease in coming months and reach the bank’s target of just below 2.0 per cent in 2009, while economic prospects are growing darker in the 15-nation eurozone, the IMF forecast.

As a result, the ECB had room to lower its rates, Deppler said, though he also suggested: Let’s get through the spring of the German (wage) negotiation round, which bank officials warn might push inflation higher in the longer term.

In early April, the IMF painted a pessimitic picture of eurozone economic prospects and had called on the ECB to cut lending rates, as have the US Federal Reserve and the Bank of England.

This time around the tone was less alarmist however, even though the fund continued to implicitly call for lower rates later in the year.

The ECB’s mandate to prevent inflation from spiraling out of control has been cited by its governors as justification for maintaining its main rate at 4.0 per cent while other banks have eased rates to underpin economic growth.

Eurozone inflation hit a record 3.6 per cent in March, and ECB president Jean-Claude Trichet has warned that if wages and general prices were raised in response to a sharp jump in energy and food prices, it could set a trend that would be increasing hard to counter.

With German labour unions now winning substantial pay raises following several years of moderation, analysts forecast the ECB rate of 4.0 per cent that was set in June would continue to hold sway until September at the earliest. Some have now begun to predict the ECB will not lower its rates at all.

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