Papademos - ECB may have leeway for rate cuts

Source: Corriere della Sera

The European Central Bank might have room for further monetary easing, but only if future economic data deems it necessary, ECB Vice President Lucas Papademos was quoted as saying on Friday.

Papademos told Corriere della Sera newspaper in an interview that the economic situation had changed little since the ECB last cut its key interest rate in June.

"We might have room for manoeuvre in the future but this will depend on new information that will allow us to determine whether further reductions are needed,'' he said.

"Current interest rates are at record lows, which, together with the global recovery, will sustain a gradual pick-up in the second half of 2003 and in 2004,'' he added.

He said the ECB expected the euro zone economy to grow 0.7 percent in 2003, 1.5 percent in 2004 and 2.5 percent in 2005.

He added that recent European economic statistics gave contrasting signals, with business and consumer confidence data looking uncertain.

"On the other hand recent developments in the financial markets are encouraging and suggest that investors expect an increase in profits and growth,'' he said.

In the current economic climate tax cuts might boost consumer confidence and spending, but they should only come if they are "appropriately financed'' and if they don't weigh on government budget deficits in the medium term.

"It is fundamental that tax cuts come with a long-term re-balancing of the pensions system,'' he said, clearly aiming his words at the Italian government which has promised tax cuts next year but has not yet committed itself to pension reform.

Asked what factors might threaten a general economic recovery, Papademos said the "considerable U.S. deficit'' might cause problems as well as a heavy debt burden run up by consumers in many countries -- especially the United States.

Papademos said he did not expect to see deflation in the euro zone. "As far as we are concerned the risk of deflation in the euro zone is very low, nothing,'' he said.

"The ECB's monetary policy looks to maintain an inflation rate that is beneath, but near to two percent in the medium term in order to ensure a sufficient margin against deflation risks.''

Papademos said the recent rise in the value of the euro had reduced profit margins for companies: "But on the other hand it has also had positive effects,'' he said, adding it had helped reduce inflationary pressures.

He also gave a cautious welcome to Italy's plans to revive the euro zone's flagging economy by boosting infrastructure spending using cash from European Investment Bank bonds.

"Launching this plan might have a positive impact and encourage growth, but we have to evaluate clearly how this plan can be financed by private funds that do not weigh on public finances,'' Papademos said.