EUROPE’S ECONOMIC recovery is still “gradual” despite surging growth in Germany, said Irish Central Bank governor Patrick Honohan yesterday.
German GDP rose 2.2 per cent quarter on quarter, its fastest quarterly rate since the country reunified in the early 1990s following the fall of the Berlin Wall, pushing the euro zone aggregate GDP growth to 1.0 per cent.
The growth spurt helped push the 16-member bloc to its fastest expansion rate in three years.
“The story is a rather slow recovery despite the rather encouraging news from Germany,” said Prof Honohan, who is a member of the European Central Bank committee that sets interest rates.
That gradual growth and still-tame inflation, as well as the lack of asset bubbles emerging, means there is no need to rush for early exit strategies from market support measures by the ECB, he said.
One of the measures the ECB has undertaken since the intensification of the global financial crisis is to lend banks as much money as they request. Although it did experiment with competitive tenders in April, it has since reversed tack.
“If we look at the last few weeks . . . we see some widening of [sovereign] spreads rather than a narrowing, so from that perspective it would not be pointing in direction of further exit steps of that type,” Prof Honohan said.
He noted that the earlier move to competitive tenders had “highlighted pockets of sensitivity in the money markets that perhaps were unexpected”.
The ECB held interest rates at a record low 1 per cent at its last meeting on August 5th and said that inflation pressures over the medium term “remain contained”.
Prof Honohan declined to comment directly on economists’ forecasts that see the ECB holding rates until well into 2011, but said he saw few signs of “excesses” emerging in asset prices. “I don’t see that at the moment, but that I think is something that will be in the back of everybody’s mind in the months ahead,” he said.
He stressed Ireland remained committed to its target of reducing its budget deficit to 3 per cent of gross domestic product by 2014.
Risk premiums on Irish bonds surged on Wednesday, hitting 300 basis points over German bonds for the first time since early July amid talk of European Central Bank action to stabilise the spread and after Anglo Irish Bank won EU clearance for another, bigger than expected bailout.
The EU last week approved plans for up to €10 billion of state aid for Anglo Irish and Prof Honohan said that plans to recapitalise the bank were well on track and had little impact on the Government’s overall deficit plans.
“If you said €22-€25 billion nobody could disagree with that for being a realistic figure for the Anglo Irish net cost to the exchequer,” he said. “In terms of overall net borrowing for the Government, this is not a game changer.” – (Reuters)
