ECB bankers happy with rates, differ on next move
ECB rate-setters Axel Weber and Lorenzo Bini Smaghi dismissed the possibility of rates being cut from their current 4.25 per cent, but fellow Governing Council member Michael Bonello said nothing could be ruled out.
Germany's Weber told news agency Bloomberg that if growth picked up towards the end of the year and in 2009 there might even be scope for further action, following July's rate rise.
"Monetary policy at the moment is roughly where it should be and I think the discussion about declining rates in Europe is premature," he was quoted as saying.
"If the economic outlook brightens somewhat again towards the end of the year and next year, which I still expect, we'll have to see if action is necessary."
Financial markets and analysts generally expect the ECB to cut rates in the second quarter of next year given weakening growth in the 15-nation region, and Weber's tough stance pushed up the euro and bond yields.
In an interview with an Italian magazine, Bini Smaghi said the July increase was needed to avoid a worsening in inflation.
"If the central bank decided to stimulate the economy by lowering interest rates this would have the effect of increasing inflation. Are we sure that is what we want?" he told Conservatori Contemporanei.
Bonello, head of the Maltese central bank, struck a different note in an interview with Reuters.
Like Weber, he said current rates were appropriate but added investors were on the right track by expecting no further change this year.
Asked if markets were in tune with ECB thinking, he said: "If you look at the yield curve, the feeling in the markets, I don't think there is any further tightening built into market expectations. By and large they are [in tune]."
Asked about the prospect of rate cuts, Bonello said nothing could be ruled out and the ECB's current 'no bias' stance on monetary policy meant it was keeping an open mind.
"My understanding of the term 'no bias' corresponds to that, in other words you are not predisposed to one particular course of action," he said.
"You can't exclude anything, a priori. Anything can happen."
STAFF FORECASTS DUE
Both Weber and Bonello said they expected ECB staff forecasts for growth to be trimmed when updated figures are released at the September 4 rate meeting, while inflation forecasts were likely to be revised up.
In June, ECB staff forecast growth of 1.5-2.1 per cent in 2008 and 1.0-2.0 per cent in 2009. Inflation was seen averaging between 3.2-3.6 per cent this year and 1.8-3.0 per cent in 2009.
Weber said it was not even certain that inflation, currently running at a record high 4 percent, would return to below the ECB's 2 per cent ceiling in 2010.
"If inflation risks further materialize and if we come to the conclusion that the inflation outlook has deteriorated, we'll have to re-examine our monetary policy stance," he said. "At the moment, this isn't an issue." Bonello said lower oil and food prices and slower growth should dampen inflation pressures but it was not clear by how much or how quickly.
He too saw inflation remaining above 2 per cent for "quite some time" and said a rise in some measures of inflation expectations were cause for concern, a stance echoed by Weber.
"Although the available information indicates that inflation expectations remain reasonably well-anchored, a rising trend in inflation expectations as shown by the 5-year forward break-even inflation rate and the latest results of the Survey of Professional Forecasters, are a cause for concern," Bonello said.
The ECB survey showed forecasters raised their long-term inflation expectations to the highest in at least a decade and five-year market-based inflation expectations are at 2.68 per cent, compared to around 2.4 per cent in May.
Weber said it was a concern that the majority of market watchers expected inflation to remain above 2 per cent even six to 10 years out, and this put the ECB's credibility on the line.
"For a central bank this puts in question its credibility and this can't be tolerated," he said.