FRANKFURT Comments by European Central Bank policymakers on Monday stressing falling inflation and poor growth prospects in the euro zone suggest the ECB may be leaning towards a further cut in its main refinancing rate.
ECB Vice-President Vitor Constancio said inflation had fallen "rather significantly" and a rate cut was "always a possibility", but Governing Council member Klaas Knot said the ECB had "little ammunition left" and should use it carefully.
The ECB left rates at a record low of 0.75 percent in April, but ECB President Mario Draghi said after its monthly policy meeting that the bank would "monitor very closely" all data and stand "ready to act" to boost the recession-hit euro zone.
But the bank believes another cut would have only limited impact because its ultra-low interest rates do not reach all economies in the currency bloc evenly, with lenders in crisis countries passing on higher funding costs to their consumers.
A rate cut would have symbolic importance, however, signaling that the ECB is ready to support the economy.
"It is a tactical decision," said Frederik Ducrozet, senior euro zone economist at Crédit Agricole said. "It is a way to manage expectations."
Annual euro zone inflation fell to 1.7 percent in March, its lowest level since August 2010, spurred by a continued downward trend in energy prices. The ECB expects inflation to fall further to average 1.3 percent next year.
Constancio said the fall in inflation was "an important factor of course for us, because inflation is always the first consideration".
"At the same time, the economy continued to give signs of weakness, and that's where we are. So when we have our next meeting we will see the latest information and we will take the decision," Constancio told news agency MNI in an interview.
He added that a new rate cut was "always a possibility".
His comments lifted German Bunds off their lows of the day as investors bet more heavily on a rate cut.
This week's economic data releases include euro zone consumer confidence on Monday, the April reading of purchasing managers' indices on Tuesday and the ECB's bank lending survey on Wednesday, with PMIs especially being looked at carefully as they could make or break the chance of a rate cut.
The ECB Governing Council will meet in Bratislava on May 2.
"Unless we get a massive surge in the PMI reading tomorrow the case for a rate cut is gaining traction," Crédit Agricole's Ducrozet said. "Otherwise you risk disappointment."
"LITTLE AMMUNITION LEFT"
ECB Governing Council member Klaas Knot, who is also the governor of the Dutch central bank, was quoted as saying by Bloomberg News over the weekend that the "last information we have on the economy isn't that positive and isn't leading to better prospects".
"We have little ammunition left so we need to ask ourselves when is the right moment to use it," he said.
His colleague on the Council, Slovenian Marko Kranjec, struck a more optimistic tone, saying if the rest of the world economy picked up, the euro zone would also be in good shape.
He also said he was not worried about inflation.
"It is a bit low, but still close to but below 2 percent. It is of course less than 2 percent, but this doesn't worry me," Kranjec told MNI in an interview, adding that it was "still consistent with price stability, it is not deflation".
(Editing by Catherine Evans)