Central Bank says rates could fall again

CENTRAL Bank governor John Hurley said the worst global downturn in decades will continue for the rest of this year but further interest rate cuts could be possible.

Some recovery is possible next year but it will be slow, he told EU ambassadors.

The International Monetary Fund has forecast a 1.5% decline in the global economy this year as the world experiences “the deepest and most synchronised downturn for many decades,” he said.

EU interest rates have been cut 3% to 1.25% in response to the fall in growth and further rate cuts cannot be ruled out, he said. “While the governing council is never pre-committed, I cannot exclude the possibility that the council may, in a very measured way, further reduce the main policy rate.”

Inflationary pressures have eased significantly since the middle of last year with the euro area headline rate at 4% as recently as last July.

Since then it has fallen to less than 1% and it will be several months hence before the world will be confronted with rising prices, he said.

The turnaround raises the prospect of headline inflation turning “negative in a number of advanced economies this year.”

That development is likely to last for a number of months in the case of the euro area, before there is a return to moderate rates of positive inflation, he said.

Policymakers have also taken unprecedented steps to limit the impact of the downturn including financial sector intervention, as well as monetary and fiscal policies.

“A very wide range of measures has been taken to support financial institutions. These include recapitalisations, deposit guarantee extensions, debt guarantees, extensive provision of credit and liquidity, and acquisition or ring fencing of bad assets. As far as monetary policy is concerned, central banks have cut policy rates significantly — in many cases to unprecedented levels — and have taken a range of unconventional measures.

“This has led to a sizeable expansion of central banks’ balance sheets, including the ECB’s. As regards further non-standard policy measures, decisions will be made and announced at our next meeting in early May,” Mr Hurley added.

Policymakers have also been focusing on how to rebuild trust in the financial system and those key issues dominated the recent meeting of the G20, where actions to build a more globally consistent supervisory and regulatory framework for the financial sector were announced.


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