VIENNA (Reuters) - Recession in the euro zone is over but growth will remain sluggish next year, so there is no need to raise interest rates soon, European Central Bank (ECB) Governing Council member Ewald Nowotny said on Monday.
However, the ECB will look vigilantly at monetary and business indicators that could indicate a rise in inflationary expectations, Nowotny said at the Reuters Central European Investment Summit, which began on Monday in Vienna and Milan.
“What we see is that this very strong and dramatic decline of the economy has reached the bottom,” Nowotny said.
“We will experience in most (European) countries in the third and fourth quarters of 2009 positive growth rates, so that means technically the recession will end this year,” he said.
“But the growth that we see is still very sluggish for the next year. For 2010 for the euro zone there will be growth rates of 0.5-1 percent. That means it is a very slow recovery, the economy is very weak,” he said.
Nowotny stuck to the ECB’s policy of not pre-committing to interest rate changes, but he said he did not see personally a need to move away from current record low interest rates of 1 percent any time soon. The ECB was also not planning to unwind its support for money markets this year, he said.
“Looking at all those factors (influencing inflation expectations), for the time being I personally would not see a need for any policy changes soon,” Nowotny said. “But we are vigilant to observe how things are developing.”
Rising consumer confidence in the euro zone’s three biggest economies of Germany, France and Italy has fanned expectations that the 16-nation region’s economy is past the worst, although policymakers have warned there may be a relapse.
Economists expect the ECB not to raise interest rates before the third quarter of next year, although the central bank has said it could start withdrawing some of the extra cash lent to banks before then. <ECB/INT>
LIQUIDITY ‘LIFE SUPPORT’ NOT PERMANENT
Nowotny said money markets were starting to work again, although it was too early to say that they were fully on the safe side.
“This is a field where ‘life support’ from the central banks may not be needed in this full amount in the future,” he said.
“There are very slight improvements going on market by market but it is too early to say that we are fully on the safe side. In general, especially also as it is a protective shield, a central bank presence is needed. But it is our intention is not to see this as a permanent feature.”
Still, Nowotny said the ECB was still discussing aspects of its exit strategy, and no exit was planned this year.
“Given the state of the economy as it is for the time being, that means for this year, we do not see a need to start executing an exit strategy but we should start of course discussing it and different approaches,” Nowotny said.
In terms of fiscal policy, he said high debt levels were a major concern and countries would have to bring down deficit levels by 2011 at the latest.
The ECB, like U.S. authorities, was keen to avoid sharp fluctuations in exchange rates but had no specific currency target, Nowotny said. The euro on Monday remained close to a one-year high of around $1.4842 hit last week.
“The ECB has no exchange rate goal. We do not comment on specific levels of the euro-dollar exchange rate. What is of current concern both for the ECB side and for the U.S. side is to avoid some abrupt movements or some overshooting,” he said.
“I think this kind of stability can be achieved but the long-term developments of exchange rates is something that has to be decided ultimately by the markets.”
Additional reporting by Sylvia Westall, writing by Krista Hughes; editing by Patrick Graham