ECB official suggests possibility of new rate cut

Monday 22 April 2013 18.18
ECB Vice-President Vitor Constancio said a rate cut was 'always a possibility'
ECB Vice-President Vitor Constancio said a rate cut was 'always a possibility'

Comments by European Central Bank policymakers, stressing falling inflation and poor growth prospects in the euro zone, suggest the bank may be leaning towards a further cut in its main refinancing rate.

ECB Vice-President Vitor Constancio said inflation had fallen "rather significantly" and a rate cut was "always a possibility".

But Governing Council member Klaas Knot said the ECB had "little ammunition left" and should use it carefully.

The ECB left rates at a record low of 0.75% in April, but ECB President Mario Draghi said after its monthly policy meeting that the bank would "monitor very closely" all data and stand "ready to act" to boost the recession-hit euro zone.

But the bank believes another cut would have only limited impact because its ultra-low interest rates do not reach all economies in the currency bloc evenly, with lenders in crisis countries passing on higher funding costs to their consumers.

A rate cut would have symbolic importance, however, signalling that the ECB is ready to support the economy.

Annual euro zone inflation fell to 1.7% in March, its lowest level since August 2010, spurred by a continued downward trend in energy prices. The ECB expects inflation to fall further to average 1.3% next year.

Constancio said the fall in inflation was "an important factor of course for us, because inflation is always the first consideration".

"At the same time, the economy continued to give signs of weakness, and that's where we are. So when we have our next meeting we will see the latest information and we will take the decision," Constancio said. He added that a new rate cut was "always a possibility".

The ECB Governing Council will meet in Bratislava on May 2.

ECB Governing Council member Klaas Knot, who is also the governor of the Dutch central bank, was quoted by Bloomberg News over the weekend as saying that the "last information we have on the economy isn't that positive and isn't leading to better prospects".

"We have little ammunition left so we need to ask ourselves when is the right moment to use it," he said.

His colleague on the Council, Slovenian Marko Kranjec, struck a more optimistic tone, saying if the rest of the world economy picked up, the euro zone would also be in good shape.

He also said he was not worried about inflation.