Bank chief hints at interest rate cut

INTEREST rates could be cut later next month the governor of the Irish Central Bank John Hurley signalled last night.

Mr Hurley, a member European Central Bank's governing body, which decides on interest rates cuts said there was room for manoeuvre on interest rates cuts.

The eurozone economy was expected to grow at a slower rate in 2003 than had been expected as recently as last December, Mr Hurley said in a speech to ACI Ireland, the Financial Markets Association.

"To the extent that activity remains weak, inflation could fall by more than we projected.

"In such circumstances, there would be some room for manoeuvre on interest rates," he said.

Last week, the European Central Bank (ECB) left rates unchanged at 2.75% but said it stood ready to lower borrowing costs given doubts over the economy with war looming against Iraq.

Mr Hurley outlined risks posed to the economy from possible conflict in the Middle East, saying: "We are currently living in uncertain times."

The euro's recent strengthening on the foreign exchanges would serve to dampen inflationary pressures and boost purchasing power, he continued.

"However, the scale of the appreciation, if it were to continue, would undoubtedly slow activity somewhat.

"In the past, the relatively weak exchange rate of the euro has placed exporters to markets outside the euro area in a relatively favourable competitive position," said Mr Hurley.

He added the recent sharp appreciation of the euro could help dampen inflation, but could slow economic activity if it continued. He said the appreciation of the euro would have a stronger impact on Ireland because of our trading links with the US and Britain.

Mr Hurley said that monetary policy formulation at the supra-national level does not mean that this is at the expense of recognising the differences in local market conditions.

"In fact, the decentralised arrangement has distinct advantages in terms of using NCB's in-depth knowledge of their local markets and liquidity conditions.

"Nor does the current set-up preclude flexible and timely responses to market developments. For example, the Eurosystem was also able to respond in a cohesive manner to the conditions that prevailed in the aftermath of tragic events of September 11th," he said.

"The ECB rapidly announced its willingness to support the normal functioning of markets and provide additional liquidity if needed. We at the Central Bank played our role alongside the rest of the Eurosystem in responding to the situation."