EU's Almunia sees room for near-term ECB rate cut

WASHINGTON (Reuters) - Falling euro zone inflation and stabilizing inflation expectations could make room for a European Central Bank interest rate cut, Economic and Monetary Affairs Commissioner Joaquin Almunia said on Saturday.

"Supported by the easing of commodity prices, the presently high inflation is on a downward trend and long-term inflation expectations are stabilizing at a lower level consistent with price stability," Almunia said in a statement.

"If confirmed, these new developments could justify some monetary easing in the near-term," he said in a rare reference to ECB monetary policy at the annual meeting of the International Monetary Fund and the World Bank.

The ECB cut rates by 0.5 percentage point to 3.75 percent together with other major central banks on Wednesday and economists expect more rate cuts could be in the pipeline.

ECB Governing Council member Christian Noyer also hinted at such a possibility on Friday by saying that inflation in the 15 countries using the euro would fall below the bank's target of just below 2 percent in mid-2009.

Euro zone inflation was 3.6 percent year-on-year in September, down from 3.8 percent in August.

Almunia said in the statement that food prices, one of the major driving forces behind the euro zone inflation surge, have peaked in the first half of the year and would decline somewhat.

He said the financial market crisis had increased downside risks to euro zone economic growth in 2009, which he forecast to "remain weak and clearly below potential."

To restore market confidence government intervention was key, he said.

"Investor confidence fell to such a level that a spontaneous recovery is no longer likely. The freeze in the interbank money markets as well as the contraction of the commercial paper market is threatening to affect the entire economic system," Almunia said.

He said governments should be ready to swap assets of banks for treasury paper, recapitalize banks, considerably expand deposit insurance protection for individuals and consider guarantees of senior and subordinated bank debt.

He said that while moral hazard issues should not be ignored, they had to be weighed against the risk of inaction entailing a prolonged freeze of the financial system and, in the end, still require an even more costly intervention.

Almunia also said that, despite its recent sharp weakening against the dollar and a more than 6 percent fall in trade-weighted terms since April, the euro was still on the strong side in real effective terms.

(Reporting by Jan Strupczewski, Editing by Chizu Nomiyama)