Bini Says ECB Cut ‘Adequate,’ Must Now Be Passed on

By Lorenzo Totaro and Flavia Krause-Jackson

Dec. 5 (Bloomberg) -- The European Central Bank did an “adequate” move yesterday as it lowered the benchmark interest rate by three-quarters of a percentage point to 2.5 percent, executive board member Lorenzo Bini Smaghi said.

“I think this was an adequate move,” Bini Smaghi said in a radio interview with Italy’s RAI broadcaster. “It is now necessary that this cut is passed on to consumers with a mortgage and companies.”

The European Central Bank’s rate reduction yesterday was the biggest in its history. Policy makers are battling to restore the flow of credit in the world’s industrialized economies after the financial crisis intensified in the wake of Lehman Brothers Holdings Inc.’s bankruptcy in September.

“There was a moment of panic after the collapse of Lehman Brothers,” Bini Smaghi said. “Citizens were wondering if their savings were safe. But this panic has subsided thanks to the strong reaction of the system, of governments and of the central bank.”

Bini Smaghi said that investors in financial markets are now showing “a lot prudence.”

“People are investing in very liquid financial tools such as deposits and government bonds,” he said. “This limits the economic recovery and the normal activity of intermediation, but we avoided and overcame the panic.”

The European Central Bank predicts a “modest” economic recovery in 2009, Bini Smaghi said.

To contact the reporters on this story: Lorenzo Totaro at in Rome or ltotaro@bloomberg.netFlavia Krause-Jackson in Rome at fjackson@bloomberg.net;