ECB policymakers see growth risk, at odds on inflation

BRATISLAVA/HELSINKI Thu Oct 13, 2011 7:51am EDT

Tourists sit on a hill overlooking Athens outside the archaeological site of the Acropolis due to a 48-hour strike by Culture Ministry employees, October 13, 2011.  REUTERS/Yannis Behrakis

Tourists sit on a hill overlooking Athens outside the archaeological site of the Acropolis due to a 48-hour strike by Culture Ministry employees, October 13, 2011.

Credit: Reuters/Yannis Behrakis

BRATISLAVA/HELSINKI (Reuters) - The euro zone could fall back into recession and the European Central Bank will discuss cutting interest rates at its policy meeting next month, ECB policymakers said on Thursday.

ECB Governing Council member Erkki Liikanen stressed, however, that the euro zone's central bank was in no way pre-committed to cutting rates when it meets in November.

Last week, the ECB opted to keep rates on hold at 1.5 percent despite some of the bank's policymakers calling for a cut amid signs the euro area economy is deteriorating further and as Greek default fears weigh on the markets.

Euro zone inflation jumped to 3.0 percent last month. Several ECB policymakers have said they expect it to ease below the bank's target level of just under 2 percent next year -- a view echoed by Jozef Makuch, Slovakia's central bank chief.

"I expect inflation to drop below 2 percent next year," Makuch said. "Negative gross domestic product can't be ruled out if downside risks materialize."

The ECB said in its October monthly bulletin, released on Thursday, that downside risks relate especially to financial market turmoil. It also saw energy prices, protectionism and global imbalances as downside threats to growth.

Makuch's views on the economic outlook echoed comments from Austrian central bank chief Ewald Nowotny, who said earlier this week the euro zone economy risks a protracted period of weakness while inflation is not a worry.

But Liikanen said risks to stable prices are still balanced.

"Risks for inflation .... are on balance," Liikanen, who is also governor of Finland's central bank, said in Helsinki. Asked about a possible ECB rate cut, he added: "We have no pre-commitment, we'll discuss that in November, next time."

INFLATION

Jose Manuel Gonzalez-Paramo, another ECB policymaker, said central banks must be unwavering in their determination to keep inflation at bay.

"The role of a central bank under any circumstances, and in crisis times in particular, is to inflexibly pursue its main objective, which in the ECB's case is price stability, and to perform as a key anchor of stability," he said.

Berenberg bank economist Christian Schulz said that despite the hawkish comments on inflation from some ECB policymakers, he expected the bank to cut rates by 25 basis points in December or January, and by the same amount in March.

The ECB's hawkish policymakers are often more vocal than those who take a more dovish view of inflation, and the hawks may feel a need to assert their opinions ahead of a change in leadership at the bank next month, when Italian Mario Draghi will replace Jean-Claude Trichet as ECB president.

"'Balanced' is quite a hawkish view at the moment," Berenberg's Schulz said of Liikanen's comments. "As always you have the hawks and some pragmatists. I think at the moment the pragmatists are clearly in the majority."

Liikanen said Europe's banks must become stronger.

"It is very important that they have better capital ratios, more capital (put in) by the investors. And if that is not possible, then states must also be ready," he said. "We must be ready so that if there are banks which are not solvent, they will be restructured."

Europe's debt crisis has deteriorated in recent weeks as uncertainty over Greece's future has increased. On Wednesday European Commission's President Jose Manuel Barroso called for decisive actions to limit the damage the debt crisis is inflicting on the economy.

"We can avoid a situation which deteriorates. The key issues are really to implement decisions taken," Liikanen said, welcoming the announcement by Slovakia -- which has held up approval for strengthening the euro zone's rescue fund -- of a deal to vote it through.

Slovakia's opposition leader said on Wednesday his party and the outgoing government coalition had agreed to ratify the EFSF rescue fund by Friday.

(Writing by Paul Carrel; Editing by Ruth Pitchford)

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