(Updates with further Papademos comments) By Emily Barrett Of DOW JONES NEWSWIRES SAN FRANCISCO -(Dow Jones)- Further rate cuts by the European Central Bank may be justified if inflation remains on a downward track, ECB Vice President Lucas Papademos said Sunday.
"If downside risks to price stability persist," he said, "easing of monetary policy could be warranted."
Papademos was participating in one of several panels commemorating the 10th anniversary of the euro at the American Economic Association's annual meeting.
The ECB has already cut its interest rate 175 basis points in recent months, to 2.5%. Declining energy prices, along with the deepening economic downturn in the euro area, has persuaded the central bank that inflation in the medium term will remain below its official ceiling of 2%.
The central banker pointed out that economic activity in the euro-zone, which expanded to 16 members on the Jan. 1 addition of Slovakia, "is likely to remain weak and may contract in the first half of the year."
The coincidence of economic downturn with the financial markets crisis presents a major challenge for policymakers, Papademos said. Despite the "unprecedented measures" taken by the central bank, which include regular currency swaps to keep dollars flowing in the system, the European financial sector is still plagued by a lack of confidence. Banks are still uncertain about the viability of their trading partners, and their own liquidity needs, Papademos said.
This uncertainty is reflected in the stubbornly high risk premiums on lending between banks, he said. But he nevertheless noted a "slow but steady decline" in these rates, and stressed that there is "no shortage of liquidity in euro money markets."
Papademos acknowledged that euro-area economies with the biggest fiscal problems may not be "sufficiently protected from credit risks" stemming from the ongoing financial crisis.
He called for bolder steps to strengthen the stability of the region's financial system as a whole, including better regulation and "early warning" measures.
"Monetary policy itself can't play a central role in preventing a recurrence" of crisis, he said. It "must be combined with effective use of regulatory tools by supervisory authorities."
-By Emily Barrett, Dow Jones Newswires; 201-938-2248; emily.barrett@dowjones.com
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Publié le 04 janvier 2009 Copyright © 2009 Dowjones