ECB says jury still out over further rate cuts

ECB executive board member Benoît Coeuré said policy makers may not cut interest rates further as confidence in the eurozone’s economic outlook is improving and inflation remains high.

“At the current juncture, the jury is open as to whether there should be another rate cut,” he said.

“It’s not absolutely obvious that another rate cut would be necessary in light of recent economic indicators and in light of inflation developments.

“As you know, inflation developments at the end are what matters most for us.”

The ECB this month raised its inflation forecasts for this year and next, even as the sovereign debt crisis is threatening to push the 17-nation euro region into recession.

Yet, details of a new bond-purchase plan unveiled by ECB president Mario Draghi on Sept 6 boosted financial markets and helped ease concerns about the severity of the economic slowdown.

Investor confidence in Germany — the region’s largest economy — gained for the first time in five months in September and gauges of activity in the manufacturing and service industries rose more than economists forecast.

At the same time, countries in the European periphery are struggling with record unemployment, sluggish consumption and dwindling exports.

“Certainly the euro-area economy is weak,” Mr Coeuré said. “Growth will be very weak in 2012 and 2013,” he said, adding the single-currency region has turned the corner “in terms of confidence and in terms of perception” and we now have conditions in place “ultimately to restore growth”.

While the ECB could “theoretically” cut its deposit rate below zero to add stimulus, it may not be feasible, he said.

Policy makers in July cut the rate at which the ECB remunerates excess overnight deposits to zero and cut the main refinancing rate to a record low of 0.75%. That’s sparked a debate about whether the ECB is willing to take rates into a territory few central banks have dared to go.

The deposit rate has served as the de facto benchmark, steering overnight market borrowing costs, since the ECB started to provide banks with unlimited liquidity after the collapse of Lehman Brothers in 2008.

Mr Draghi said on Aug 2 that negative rates were “largely unchartered waters” for the ECB.