IMF chief says ECB rate cut cannot be ruled out

A European Central Bank (ECB) interest rate cut cannot be ruled out if the European economy weakens, International Monetary Fund (IMF) managing director Rodrigo Rato was quoted at the weekend as saying.

The ECB had the option of cutting rates, Mr Rato said in an interview with Spanish financial daily Expansion. His comments are particularly potent because they were made before French and Dutch voters rejected the European Constitution, plunging Europe into a political crisis.

Asked if the IMF recommended that the ECB keep open the option of a rate cut, Mr Rato said: "It's not that we've recommended them not to rule it out (the option of cutting rates) ... What we've said is that it cannot be ruled out in the event of greater weakness of the European economy."

On Thursday, the ECB rejected calls for a cut in interest rates.

"It's true that European monetary conditions are loose, and in some countries very loose," Mr Rato said. "We've never thought monetary policy is responsible for European economic weakness. The ECB is right about that. The bank has been very efficient, in a very short time, in creating a credible monetary policy," he said.

"But monetary policy can play a role in the economic situation at the time or even in expectations. And we think you should not rule out any kind of measure in a situation in which weakness was much greater (than it is now)," he added.

Asked about uneven growth in the euro zone and the view of some economists that a one-size-fits-all monetary policy was not working, Mr Rato said a homogeneous market like the US could not be built overnight.

"I think you have to learn from the European experience. It's very new and doesn't have too many equivalents," he said.

Italian Welfare Minister Roberto Maroni, from the euro-sceptical Northern League, caused uproar on Friday by saying Italy should consider adopting its own currency again, fuelling talk of a possible break-up of the euro zone which EU leaders have dismissed as "absurd".

The latest dismissal came from ECB governing council member Christian Noyer who said the euro did not face any threat from the rejection of the EU constitution by two founding member states. "Clearly it's an absurd assumption," Mr Noyer told French newspaper Le Parisien.

"The euro is our currency, of the citizens of the 12 countries that have adopted it," he said.

His comments follow those of ECB president Jean-Claude Trichet on Friday who also said it was "absurd" to talk of any euro- zone country ditching the euro.

Euro-zone finance ministers are expected to launch a drive to shore up the euro this week. - (Reuters)