Interest rates could fall further

The Straits Times
Nov 14, 2008 | 7:36 PM
Interest rates could fall further

FRANKFURT - EUROPEAN Central Bank senior economist Juergen Stark underpinned on Friday expectations of further interest rate cuts to battle the effects of an economic recession.

'If our analysis allows for it, we do not rule out using this instrument again,' Mr Stark told a local radio station a week after the ECB cut its main lending rate for the second time in a month, to 3.25 per cent.

Following combined cuts of one percentage point, ECB president Jean-Claude Trichet also implied last week that the bank could decrease the cost of borrowing even further owing to signs that economic activity was falling.

Two of the biggest eurozone economies, Germany and Italy, are now in recession, but inflation has also come off the boil and the ECB has room to lower its lending rate rapidly and to a low level, analysts say.

Economist Peter Bofinger, one of five German experts that advises the government on economic policy, told the Frankfurter Rundshau newspaper the rate should be cut to 2.0 per cent.

'The benchmark rate was at this level between 2003 and 2005. At the time the eurozone economy was in much better shape than today,' Mr Bofinger said.

Asked about the comments, Mr Stark gave a cautious answer.

'We should be careful in taking decisions to resolve this crisis, not to lay the foundation for fresh excesses,' he said. -- AFP