Inflation trends strengthen prospect of ECB rate cut

European Central Bank (ECB) council member and Bundesbank president Mr Ernst Welteke has joined fellow central bankers in signalling the bank is ready to cut interest rates if inflation prospects improve further. Mr Welteke said there were early signs of a further fall in inflation in the near future.

"If, in the governing council of the ECB, we see the possibility of reducing interest rates further without compromising price stability, we will do so," he said. The comments echoed those of fellow ECB council member Mr Guy Quaden over the weekend and ECB president Mr Wim Duisenberg at the summit of EU leaders in Ghent, Belgium, 10 days ago.

Financial markets for weeks have expected the ECB to cut its key interest rate from its current 3.75 per cent rate as growth and employment prospects worsened after last month's attacks on the United States. So far, the ECB has refused to budge, preferring to keep its powder dry until the economic fall-out from last month's attacks becomes clearer.

The ECB cut rates by half a percentage point on September 17th in a joint move with the US Federal Reserve and other central banks following the September 11th attacks. Many analysts are forecasting at least a quarter-point rate cut at the ECB policy-making council's next meeting on November 8th, to partly catch up with the more aggressive rate cuts by the Federal Reserve in response to the global slowdown. Mr Welteke stressed that ECB policy was focused on keeping prices stable and said there was good news on euro-zone inflation.

Consumer inflation had fallen from the recent peak of 3.4 per cent in May and early indicators such as producer prices and preliminary German inflation of 2 per cent in October pointed to a further fall in inflation in the near future, he said. Mr Quaden, governor of Belgium's central bank, said: "If prospects for inflation continue to improve, a new cut will be possible and also desirable if prospects for growth continue to deteriorate."

At the EU summit in Ghent earlier this month, Mr Duisenberg said he expected euro-zone inflation to fall below the ECB's 2 per cent inflation goal early next year.

Mr Welteke said euro-zone growth had fallen "significantly below" its long-term potential rate, which the ECB estimates at 2 to 2.5 per cent. He said a return to the 2.5 per cent annual growth would be delayed after the September 11th attacks on the US. The biggest risk to the global economy at the moment was the psychological effects of the attacks.

"Confidence-building is the most important thing we can do in the current situation," he said.