ECB’s Mersch Opposed to Zero Interest-Rate Policy

By Angus Whitley

Feb. 10 (Bloomberg) -- European Central Bank council member Yves Mersch said he’s against following the example of the U.S. Federal Reserve and lowering interest rates to zero.

“I do not consider that we are in the same position as other countries,” Mersch told Bloomberg News today in Kuala Lumpur, where he is attending a meeting of central bankers. “We are an independent central bank.” He declined to comment further.

The ECB has reduced its key interest rate to 2 percent, matching a record low, to fight Europe’s worst recession since World War II. President Jean-Claude Trichet signaled last week the bank may cut rates by another 50 basis points in March. Still, it would be “inappropriate” to lower the benchmark to zero, Trichet said. Mersch, who heads Luxembourg’s central bank, said he agrees with Trichet.

One of the reasons policy makers oppose a zero-rate policy is the so-called stickiness of inflation in the 16-nation euro region. Inflexible labor markets and a lack of competition make inflation more persistent than in the U.S. That means “deflation is less likely,” ECB council member Erkki Liikanen said Jan. 30.

Inflation, which the ECB aims to keep just below 2 percent, slowed to 1.1 percent in January, the lowest rate since July 1999 and down from a 16-year high of 4 percent just seven months ago.

While the ECB expects inflation to drop to “very low levels” in the summer, it predicts it will accelerate in the second half of the year.

‘Dangerous’ Fallacy

The ECB’s wait-and-see approach is opening it to criticism that it’s not acting fast enough to protect the economy.

Spain’s industrial production fell 19.6 percent in December from a year earlier and in Germany, Europe’s largest economy, factory orders extended their worst slump on record.

Europe’s service and manufacturing industries contracted for an eighth month in January and confidence in the economic outlook plunged to a record low. The European Commission expects the economy to shrink 1.9 percent this year.

Athanasios Orphanides is the only ECB council member so far to have advocated the idea of zero rates. The suggestion that monetary policy becomes ineffective when rates are close to zero is a “dangerous” fallacy, Orphanides said in a Jan. 28 speech.

To contact the reporter on this story: Angus Whitley in Kuala Lumpur at awhitley1@bloomberg.net