ECB may need to cut rates, economist says

Updated: 2011-09-22 07:57

(China Daily)

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Some member institutions opposed to monetary loosening

WASHINGTON / FRANKFURT - The European Central Bank (ECB) will need to ease monetary policy if economic conditions continue to deteriorate, the International Monetary Fund (IMF) said on Tuesday.

The IMF said that the ECB "must continue to intervene strongly" in European debt markets to "maintain orderly conditions."

"If downside risks persist, the ECB should cut rates," said IMF senior economist Jorg Decresson.

"At this stage, it is still a bit early, but there are many indicators pointing to these downside risks persisting, and consistent with that, if the economy does not take a turn for the better, there will be a need to cut rates," he said at a news conference on the IMF's World Economic Outlook.

Asked about Italy's ratings downgrade by Standard and Poor's, Decresson did not comment directly but said that its government must remain focused on boosting output and deficit reduction.

"The issue here is the growth rate, which is relatively low, so the challenge there is for the government to continue to implement its plans with respect to fiscal consolidation and at the same time to embark on fiscal reforms to promote growth," he said.

Germany's central bank Bundesbank said it rejects the IMF's call for the ECB to "increase" its bond purchases to stem the region's fiscal crisis.

"The Bundesbank stresses the significance of a strict division between monetary and fiscal policy," the Frankfurt-based institution said in a statement on Wednesday. "Therefore, we reject the IMF recommendation in the World Economic Outlook to increase the purchase program of government bonds in the eurosystem."

"We are opposed as far as the instrument of euro bonds is concerned because we believe you can't fight debt in Europe by making it easier to take up debt," German Foreign Minister Guido Westerwelle told reporters in Berlin on Sept 14.

French Finance Minister Francois Baroin said on Monday that bonds backed by the entire euro area may eventually be an option, though they aren't an immediate solution to the region's sovereign-debt problems.

Borrowing difficulty

The ECB said it will lend dollars to one eurozone bank on Thursday, a sign it remains difficult to borrow the currency in markets.

The ECB on Wednesday allotted $500 million to one bidder in a regular seven-day liquidity-providing operation at a fixed rate of 1.07 percent.

Last week, the ECB lent $575 million to two eurozone banks, the first time financial institutions had requested the currency since Aug 17.

Reuters-Bloomberg News

(China Daily 09/22/2011 page17)


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