Bloomberg News

ECB Rate Cut Favored by More Than One Person, Kaasik Says

March 08, 2013

More than one European Central Bank policy maker was in favor of cutting interest rates yesterday, said Ulo Kaasik, Deputy Governor of the Estonian central bank.

When ECB President Mario Draghi said there was a “prevailing consensus” for keeping borrowing costs on hold, that “means that there was more than one person favoring a rate cut,” Kaasik said in an interview in Tallinn today.

The ECB left its benchmark interest rate at 0.75 percent, already a record low. While policy makers lowered their economic forecasts, they maintained an outlook for a gradual recovery later this year, and Draghi signaled that Europe’s economy will have to get worse before he’ll consider more stimulus.

“Risks to price stability have significantly declined, inflationary expectations are well anchored,” Kaasik said. “At the same time we feel that on the real economy, the risks are clearly on the downside. We think growth will resume at the end of the year, but it won’t be easy.”

The ECB’s pledge last year to buy bonds of distressed nations that sign up to reforms has restored calm in financial markets and reduced borrowing costs for countries such as Spain and Italy. At the same time, lending conditions for businesses haven’t improved in all parts of the region, and small and medium-sized companies, the backbone of most European economies, are still struggling to obtain funding.

Credit Flow

“There is a worry now that even as the situation in the peripheral countries is improving with regards to governments and banks, it has not led to loan conditions improving everywhere,” Kaasik said. “Indeed the central bank has a lot of tools to react but the question is whether it is a matter for the central bank to solve problems stemming from banking-sector peculiarities, its past problems, which isn’t within the mandate of the central bank.”

ECB Executive Board member Joerg Asmussen said yesterday that it’s not the ECB’s role to provide additional liquidity for small and medium-sized firms in need of funding. The ECB doesn’t have the mandate or the instruments for that, he said.

The ECB yesterday predicted the 17-nation economy will shrink 0.5 percent this year, more than the 0.3 percent contraction forecast three months ago. The estimate for 2014 growth was reduced to 1 percent from 1.2 percent. The central bank also cut its 2014 inflation projection to 1.3 percent from 1.4 percent. It aims to keep inflation just below 2 percent.

The ECB omitted from its policy statement last month’s comment that the euro’s appreciation posed a downside inflation risk, after the single currency retreated.

“The euro exchange rate certainly has a certain impact on economic indicators, like growth and inflation, but it shouldn’t be overestimated,” Kaasik said. “If the fluctuations are very big over a short time, it will raise concerns.”

The exchange rate “is now at the historic average,” he said. “It is difficult to see why we should pay too much attention to this. It matters if it starts affecting our activity in fulfilling our mandate.”

To contact the reporter on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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