ECB’s Papademos Says March Interest Rate Cut May Be Appropriate

By Gabi Thesing

Feb. 12 (Bloomberg) -- European Central Bank Vice President Lucas Papademos said officials will probably cut interest rates to a record low next month and indicated he would support the use of unconventional tools at any time.

“A further easing of monetary policy may be appropriate” next month, Papademos said in a speech delivered in London late yesterday. “I do not see a dependence, or necessary sequence, between the level or path of policy rate and the possible adoption of ‘non-standard’ measures.”

The ECB is under pressure to follow the Federal Reserve and the Bank of England in announcing how it will stimulate the economy as interest rates drop to record lows. While ECB officials say they don’t want to cut rates to zero, its current benchmark of 2 percent is already the lowest in the central bank’s history.

President Jean-Claude Trichet last week refused to say if the ECB had immediate plans to buy government or corporate debt as Europe faces its worst recession in decades. By contrast, the Fed is already buying corporate paper and the Bank of England yesterday said it’s prepared to create money to help the economy.

Papademos said it’s too soon to say that the slowdown across the euro region economy is over. While some surveys have “showed signs of stabilization,” he said that “stormier weather may still lie ahead.”

“The latest data and survey indicators point to a substantial decline in real gross domestic product in the fourth quarter of 2008 and to a continued weakness in economic activity in the euro area in the first half,” said Papademos. While inflation may slow “close to zero,” the risk of deflation is “remote,” he said.

Ready to Cut

His comments echoed remarks yesterday by other ECB officials. Spain’s Miguel Angel Fernandez Ordonez said in Zaragoza that “it’s very probable that in the next session we will cut” and Belgium’s Guy Quaden said in Brussels he’s “absolutely ready” to reduce rates again

Papademos indicated that the ECB wouldn’t necessarily have to cut rates to zero before expanding its monetary policy toolkit.

“Any measures that may be deemed appropriate to improve the functioning of markets and help stabilize the financial system may be taken independently of the level of policy rates,” he said.

Papademos said that governments should provide the economy with “additional oxygen” to complement efforts by the ECB to shore up demand. At the same time, “the various ingredients of the fiscal stimulus packages need to be carefully chosen” and should contain a “credible exit strategy.”

To contact the reporter on this story: Gabi Thesing in Frankfurt gthesing@bloomberg.net.