Papademos does not rule out rate cut

European Central Bank Vice President Lucas Papademos isn’t ruling out a further reduction in interest rates if the outlook for eurozone growth and inflation slows further, according to a German newspaper interview. Room for further easing «would depend upon whether an economic slump is seen as longer-lasting or temporary,» he was quoted as saying in today’s edition of Boersen-Zeitung. An advance copy of the interview was released by the newspaper. The ECB last month lowered its key lending rate by 50 basis points, bringing its most important rate to 2.75 percent. Its Governing Council will meet on monetary policy next Thursday, but economists widely expect the ECB to keep rates on hold. Papademos acknowledged that the economic outlook is clouded by uncertainties ranging from oil prices to export demand from Japan and the US as well as the timing of a turnaround in business and consumer sentiment. «Despite these uncertainties, there are good reasons to stick to our scenario of a gradual pickup» in the economy, Papademos said. «We are calculating that the economy in the eurozone in the coming months will remain sluggish, but it is probable that during the course of 2003, a gradual pickup in the economy will occur, but the average growth rate will be moderate,» Papademos added. He noted that most institutions project eurozone growth to be in a range of 1.7-2.3 percent in 2003. «This outlook, however, has a higher degree of uncertainty than usual,» Papademos acknowledged. He also repeated the ECB’s expectation that «inflation during the course of 2003 will fall under 2 percent and remain at a level that is consistent with price stability» – helped by the weaker economic environment and the stronger euro. On the ECB’s plan to review its controversial two-pillar strategy, Papademos warned against concluding that changes would be forthcoming from this review. «The aim is to judge the efficiency of our strategy objectively and extensively. In no way should the announcement of the review reflect dissatisfaction with the strategy,» he said. The review, announced last month by ECB President Wim Duisenberg, will take place during the first half of 2003. It has led many analysts to speculate that the ECB is preparing to drop money-supply growth as the first pillar in its assessment of inflation risks.