<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR>Dec 21, 2008
</TR><!-- headline one : start --><TR>Further rate cuts possible: ECB <!--10 min-->
</TR><!-- headline one : end --><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"-->MADRID/ROME - THE European Central Bank is likely to cut interest rates next month if inflation expectations are well below its target of close to 2 per cent, ECB Council member Miguel Angel Fernandez Ordonez said in an interview on Sunday.
'We will decide in January. If, among other variables, we see that inflation expectations are much lower than 2 per cent, it's logical that we would lower rates,' Bank of Spain Governor Ordonez told El Pais daily.
He had been asked if the ECB would cut rates again following the dramatic move by the US Federal Reserve this month, which slashed rates to 0.00-0.25 per cent.
Many economists expect inflation in the 15-member euro zone to fall below 1 percent during 2009 due to the steep fall in commodity prices and weak demand.
The ECB lowered rates by three quarters of a percentage point to 2.5 per cent this month, its largest cut ever, and some analysts have been expecting it to take a pause after the recent series of cuts and leave rates on hold in January.
Recent comments by council members have suggested the bank may be divided on the best near-term course of action, an impression reinforced by another newspaper interview on Sunday by ECB Executive Board member Lorenzo Bini Smaghi.
Asked by the Rome daily Il Messaggero if the ECB would considering following the Fed's lead on rates, Mr Bini Smaghi said the lending situation in the United States was worse than in Europe and warned about the risks of monetary policy that was too lax.
'The United States' situation is very different from Europe's ...the (US) transmission mechanism works less well,' Mr Bini Smaghi said.
'We must not forget that the current crisis was caused by a period of interest rates taken to a very low level for too long,' he added.
Mr Ordonez said the Fed's move was justified by a more worrying economic outlook. 'If we had expectations of profound deflation as they do there, we would certainly recommend the same action as the Fed,' he said.
Mr Ordonez also warned the international economic crisis may drag on longer than expected.
'There is an expectation that the (low point) will be the end of 2009 or the start of 2010. But it could drag out further due to the lack of confidence,' he said.
'The interbank market isn't working and this is leading to a vicious circle; consumers aren't consuming, businesses aren't hiring, investors aren't investing and banks aren't lending.
'There is almost total paralysis which almost nobody can escape.'
Mr Bini Smaghi appeared cautious but more upbeat. He said markets were 'slowly and gradually settling down' although interbank lending rates needed to come down more quickly towards official ECB rates, while measures adopted by governments and central banks 'are starting to produce their effects'.
He expressed doubt that Euribor, the reference interbank lending rate, was a 'transparent' and accurate reflection of interbank transactions.
He also urged banks to make loans more readily available to customers to limit the impact of the financial crisis on the real economy and called on banks to accept offers of public capital to improve confidence in the banking system.
He warned that survey data suggested banks plan to further tighten credit conditions and said this would be 'self-harming' for the banks themselves as well as for the economy.
He called for the ECB to be given a greater role in financial supervision in Europe by increasing coordination between supervision over single institutions and vigilance over credit markets as a whole, which is in central bank hands.
The ECB should be given a role in the colleges charged with supervising big banking groups, he said.
Looking back over public policy in 2008, Mr Bini Smaghi said that allowing the failure of US investment bank Lehman Brothers had been a mistake and its consequences had been underestimated.
However, he defended the ECB's often criticised decision to raise interest rates in July, saying it was justified by inflation rates and expectations at the time and had also contributed to the subsequent sharp drop in inflation. -- THOMSON REUTERS <!-- end of for each --><!-- vbbintegration : start --><!-- vbbintegration : end --><!-- dennis change request 20070424 : start --><!---Google ad - Start : Sun, 21 Dec 2008 23:23:24:509---><!-- AdSpace STI Google ad tag --><SCRIPT language=JavaScript1.1 src="http://ads.asia1.com.sg/js.ng/site=tsti&pagepos=20&size=10X10"> </SCRIPT>
</TR><!-- headline one : start --><TR>Further rate cuts possible: ECB <!--10 min-->
</TR><!-- headline one : end --><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"-->MADRID/ROME - THE European Central Bank is likely to cut interest rates next month if inflation expectations are well below its target of close to 2 per cent, ECB Council member Miguel Angel Fernandez Ordonez said in an interview on Sunday.
'We will decide in January. If, among other variables, we see that inflation expectations are much lower than 2 per cent, it's logical that we would lower rates,' Bank of Spain Governor Ordonez told El Pais daily.
He had been asked if the ECB would cut rates again following the dramatic move by the US Federal Reserve this month, which slashed rates to 0.00-0.25 per cent.
Many economists expect inflation in the 15-member euro zone to fall below 1 percent during 2009 due to the steep fall in commodity prices and weak demand.
The ECB lowered rates by three quarters of a percentage point to 2.5 per cent this month, its largest cut ever, and some analysts have been expecting it to take a pause after the recent series of cuts and leave rates on hold in January.
Recent comments by council members have suggested the bank may be divided on the best near-term course of action, an impression reinforced by another newspaper interview on Sunday by ECB Executive Board member Lorenzo Bini Smaghi.
Asked by the Rome daily Il Messaggero if the ECB would considering following the Fed's lead on rates, Mr Bini Smaghi said the lending situation in the United States was worse than in Europe and warned about the risks of monetary policy that was too lax.
'The United States' situation is very different from Europe's ...the (US) transmission mechanism works less well,' Mr Bini Smaghi said.
'We must not forget that the current crisis was caused by a period of interest rates taken to a very low level for too long,' he added.
Mr Ordonez said the Fed's move was justified by a more worrying economic outlook. 'If we had expectations of profound deflation as they do there, we would certainly recommend the same action as the Fed,' he said.
Mr Ordonez also warned the international economic crisis may drag on longer than expected.
'There is an expectation that the (low point) will be the end of 2009 or the start of 2010. But it could drag out further due to the lack of confidence,' he said.
'The interbank market isn't working and this is leading to a vicious circle; consumers aren't consuming, businesses aren't hiring, investors aren't investing and banks aren't lending.
'There is almost total paralysis which almost nobody can escape.'
Mr Bini Smaghi appeared cautious but more upbeat. He said markets were 'slowly and gradually settling down' although interbank lending rates needed to come down more quickly towards official ECB rates, while measures adopted by governments and central banks 'are starting to produce their effects'.
He expressed doubt that Euribor, the reference interbank lending rate, was a 'transparent' and accurate reflection of interbank transactions.
He also urged banks to make loans more readily available to customers to limit the impact of the financial crisis on the real economy and called on banks to accept offers of public capital to improve confidence in the banking system.
He warned that survey data suggested banks plan to further tighten credit conditions and said this would be 'self-harming' for the banks themselves as well as for the economy.
He called for the ECB to be given a greater role in financial supervision in Europe by increasing coordination between supervision over single institutions and vigilance over credit markets as a whole, which is in central bank hands.
The ECB should be given a role in the colleges charged with supervising big banking groups, he said.
Looking back over public policy in 2008, Mr Bini Smaghi said that allowing the failure of US investment bank Lehman Brothers had been a mistake and its consequences had been underestimated.
However, he defended the ECB's often criticised decision to raise interest rates in July, saying it was justified by inflation rates and expectations at the time and had also contributed to the subsequent sharp drop in inflation. -- THOMSON REUTERS <!-- end of for each --><!-- vbbintegration : start --><!-- vbbintegration : end --><!-- dennis change request 20070424 : start --><!---Google ad - Start : Sun, 21 Dec 2008 23:23:24:509---><!-- AdSpace STI Google ad tag --><SCRIPT language=JavaScript1.1 src="http://ads.asia1.com.sg/js.ng/site=tsti&pagepos=20&size=10X10"> </SCRIPT>
