Despite surging growth in Germany Europe's economic recovery is still ‘gradual’, according to Central Bank Governor Patrick Honohan.
Tthe 2.2% GDP quarter-on-quarter rise in euro zone's largest economy helped push the 16-member bloc to its fastest expansion rate in three years.
It is the 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%.
‘The story is a rather slow recovery despite the rather encouraging news from Germany,’ Mr Honohan told Reuters in an interview.
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, Mr Honohan 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,’ the Central Bank governor 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% at its last meeting on 5 August and said that inflation pressures over the medium term ‘remain contained’.
Mr Honohan declined to comment directly on economist 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.
Ireland committed to budget measures
Mr Honohan stressed Ireland remains committed to its target of reducing its budget deficit to 3% of gross domestic product by 2014.
Risk premiums on Irish bonds surged on Wednesday, hitting 300 basis points over German bunds for the first time since early July amid 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 €10bn of State aid for Anglo Irish Bank and Mr 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 (euros) 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,’ he said.
