ECB economist hints at cut in interest rates

EUROPEAN Central Bank (ECB) economist Otmar Issing has appeared to raise prospects of a cut in European interest rates for the first time since June 2003.

Asked by Der Spiegel magazine if market expectations of a cut were right he said: “in the past, financial markets almost always anticipated ECB policy decisions correctly.”

In effect, Mr Issing is believed to have implied that the markets, which have started to anticipate a cut by the ECB, were on the right track.

However, IIB Bank chief economist Austin Hughes urged investors not to rush out to top up their loans on the basis of his comment. While Mr Issing’s comments hit the euro hard, pushing it to a nine-month low, it did not necessarily mean that is where ECB interest rate policy is headed, said Mr Hughes.

In a detailed analysis of the euro weakness and fears of a break-up of the euro, Mr Hughes said there was just a one-in-three chance of the ECB cutting rates in the near future.

A lot of the stimulus required to boost the European economy “is in effect being achieved though the weaker euro,” he said.

Commenting on the speculation about a break-up of the euro, Mr Hughes was extremely sceptical.

If it happened, the net effect would be to push up interest rates in Ireland to 5%.

An undermining of the euro would eliminate the predictability people have come to expect from the stability membership of the euro has given to the economy and its people, he said.

On the question of an immediate cut in interest rates, Mr Hughes said some reports had taken Mr Issing out of context.

“The ECB is not guided by the assessment of the financial markets, but we have great interest that the direction of our monetary policy is anticipated early and the markets do not experience unpleasant surprises.”

That to Mr Hughes did not suggest a definite yes to lower interest rates.

While the ECB subsequently said the quotes were incomplete, the damage to the euro was already done.

It was also significant that despite the speculation of a cut in rates sometime in autumn, term rates firmed in Europe yesterday, said Mr Hughes.