ECB interest rate cut unlikely this year

THE ECB dealt another hammer blow to the prospect of lower interest rates yesterday as a leading council member said the present policy would help the battle against inflation.

Yves Mersch said the current 4% interest rate would help keep inflation in check, signalling the bank was not about to cut rates anytime soon.

His remarks echoed those of ECB president Jean Claude Trichet who said last week inflation was still the bank’s priority after the bank left its rates unchanged.

“We’ve said that the current level will help contribute to reaching our medium-term objective,” said Mersch, who is governor of Luxembourg’s central bank.

He told Bloomberg that while the risks of an economic slowdown had increased, inflationary risks were still on the “upside”.

His remarks strengthen the belief that the ECB will hold rates at 4% for the rest of the year.

Simon Barry, senior economist of Ulster Bank said after last week’s ECB meeting it was clear the bank was more worried about inflation than an economic slowdown.

For that reason he said the bank was likely to keep rates unchanged for the rest of the year.

With inflation staying above 3% for some time, the ECB is concerned rising fuel prices and higher wages will spark a round of secondary inflation and push overall inflation higher.

Its mandate is to keep inflation close to but just under 2%.

The ECB has held back from following the US Federal Reserve and Bank of England in cutting rates, insisting inflation and not economic growth is the bigger concern.

Inflation slowed to 3.3% in April from a 16-year high of 3.6% in March, still well above its mandated level.

However, IIB chief economist Austin Hughes, said the slowdown in economic growth in Europe would allow the bank to cut rates before the year end.

Rates would fall by about 0.5% by the end of the first quarter of 2009, he said.

Another ECB council member, Vitor Constancio said yesterday he saw no risk of a recession in Europe despite probable slower growth in the second half of the year.

“It was always clear that there would be a deceleration in European growth in the second half of this year,” Constancio said.

“I think there are no risks of recession in Europe or in Portugal.”

Asked about inflation, he said: “In global terms, inflation is rising“, adding to the view that the ECB will not be offering any comfort to the struggling Irish economy by way of lower interest rates for some time to come.


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