The European Central Bank does not have a lot of room for manoeuvre after its interest rate cut last week and any further reductions could be done only in small steps, ECB executive board member Juergen Stark said last night.
Speaking at a university symposium, Mr Stark said: "After this substantial rate cut, the remaining room for manoeuvre is very limited, potentially allowing for small steps only." Since October 8th, the ECB cut its rates three times with an overall reduction of 175 basis points, with the last cut made last week.
Mr Stark said the 75 basis-point cut last week had taken into account that the inflation rate will decline further in quarters to come and that inflation risks are on the downside for the medium term.
Mr Stark said the ECB had made it very clear that the decrease of 175 basis points within two months is exactly what is appropriate in light of all available data.
"New relevant information for the euro area which allows for a serious reassessment of the outlook for price stability will very likely not be available before February or March 2009," Mr Stark said.
Mr Stark stressed the mandate of the ECB is to maintain price stability over the medium term.
"The monetary policy stance appropriate to fulfill the ECB's mandate depends exclusively on its assessment of the balance of risks to price stability, and nothing else," he added.
He noted the significant intensification of the financial crisis since mid-September has greatly affected the outlook for short-term economic growth in the euro area.
"After two negative quarters of economic growth, GDP growth in the fourth quarter 2008 and in the coming quarters will be very weak," he said.
He said the ECB staff projections, which were released last week, had significantly revised down the June forecasts and "uncertainty surrounding the projections is particularly high at this juncture."
The ECB staff last week had forecast 2009 euro zone growth at a range of minus 1 per cent and 0 per cent and for 2010, at a range of 0.5 per cent and 1.5 per cent.
He said the European Commission forecast growth near zero in 2009 and quarterly growth rates to remain very low until the second quarter of 2010, while the IMF and the OECD see the euro area in recession in 2009. "Uncertainty is extremely high and risks are further to the downside," he added.
He said the depth and duration of the global economic downturn will crucially depend on the development of the financial crisis. "At the current juncture, market volatility and uncertainty remain extremely high," he said.
"Global inflationary pressures are easing due to the global economic downturn and falling commodity prices. All in all, the global inflation outlook has improved," he added.
Reuters