(Updates with additional comments from institutes in last paragraph.)
Oct. 13 (Bloomberg) -- The European Central Bank will lower its benchmark interest rate to 1 percent by the end of the year and keep it there through 2012 as the economy cools, Germany’s top economic institutes said in a joint forecast.
Inflation in the 17-member euro region will slow to 1.5 percent next year and inflation expectations have “clearly weakened” in recent months, the institutes said in their twice- yearly outlook in Berlin today. That’s giving the central bank room to lower borrowing costs from 1.5 percent, they said.
The ECB last week resisted calls to lower rates, instead opting to extend the use of unconventional tools by providing banks with unlimited cash and purchasing covered bonds. The central bank said in its monthly report today that while the economy is facing “intensified downside risks,” inflation may remain above its 2 percent ceiling for the rest of 2011.
The institutes said the Frankfurt-based central bank lost credibility with its decision to purchase bonds of distressed euro-region nations such as Greece, and called on policy makers to stop the program. Governments should help the bank by taking over some of its crisis-fighting tools, they said.
Euro-region governments should “create a central institution that can quickly support or, if needed, wind down systemically important banks,” the institutes said. That would allow the ECB to “focus entirely on stabilizing inflation and managing liquidity in the banking sector.”
--Editors: Simone Meier, Fergal O’Brien
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