ECB directors fuel expectations of new interest rate cut

FRANKFURT: Top European Central Bank (ECB) directors on Thursday fueled expectations of another interest rate cut soon to counter a recession in the 15-nation eurozone.

Economic deterioration and a rapid cooling of inflation "obviously gives room for further measures from the side of the ECB," which has already lowered interest rates by a full percentage point in less than one month, Austrian central bank governor Ewald Nowotny told the Financial Times Deutschland (FTD).

His counterpart at the German national bank, Axel Weber, told a banking forum here later: "We have already used it (room of maneouvre to cut the rates) and we have said that we are likely to use this room of manoeuvre again."

Both central bank governors are members of the ECB governing council, which meets monthly to decide if the bank's main lending rate, currently 3.25 percent, is still appropriate.

The central bank cut its main lending rate by 50 basis points in a joint move with other central banks on October 8 and then reduced it by another 50 points on November 6.

Many analysts felt the ECB was too timid however, in contrast with the Bank of England, which slashed its main rate by a record 1.5 percentage points on November 6 after taking part in the coordinated cut on October 8.

Nowotny suggested the ECB might continue to favour smaller cuts over spectacular ones despite market opinion.

"Nobody, I really think, knows how deep this recession will go ... so therefore it makes perfect sense not to use all your firepower at once," Nowotny told the FTD.

Analysts expect the ECB to cut its rates again by a half percentage point at the next governing council meeting on December 4.

The Austrian bank governor also urged Germany to contribute more to a mooted 130-billion-euro (163-billion-dollar) European Union economic stimulus programme, saying Berlin could double the suggested amount of one percent of gross domestic product.

An German economy ministry spokeswoman said on Wednesday that one percent of GDP represented 25 billion euros.
"There is really a lot of room for manoeuvre especially in Germany," Nowotny said.

Germany officials are wary of increasing spending excessively since public finances have already been burdened by the economic slump.

ECB chief economist Juergen Stark warned Tuesday against trying to resolve the global financial crisis with short-term spending.

"There is a substantial risk that the mistakes of the 1970s will be repeated," Stark said.
Nowotny told the Financial Times that EU fiscal rules nonetheless provided for some flexibility in "exceptional circumstance."