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ECB can cut its main rate a little more

Latest update : 2009-03-17

The European Central Bank (ECB) has said they still "have a little room for manœuvre to cut rates again". The ECB cut its main rate earlier this month to an all-time low as the 16-nation eurozone experiences its first recession ever.

AFP - The European Central Bank can cut its main interest rate a little below the historic rate of 1.5 percent but the ECB is nearing its lowest point, chief economist Juergen Stark said on Tuesday.

"We still have a little room for manoeuvre to cut rates again," Stark told the German daily Handelsblatt in an interview.

"But in my opinion, the floor is not far from where we are at the moment."

The ECB cut its main rate earlier this month to an all-time low as the 16-nation eurozone wallows in its first recession ever.

ECB President Jean-Claude Trichet also indicated then that the bank's main lending rate could be lowered further, but did not give a firm idea on when that might happen.

Several ECB directors have voiced reservations on taking the main rate too low, whereas the US Federal Reserve and Bank of Japan have cut their rates to essentially zero, and the Bank of England is very close, at 0.50 percent.

But Stark said that "despite a higher reference rate, eurozone financing conditions are more favourable than in Britain or the United States" in the medium and long term.

And in general, "with rates that are too low, we cannot reactivate the interbank market," Stark maintained, because "commercial banks will develop their activities only via the central bank."

Direct lending between commercial banks, crucial to getting money markets back on track, would remain restricted, he argued.

Date created : 2009-03-17