The financial crisis could hit the euro zone economy harder than expected, dampening inflation, and potentially clearing the way for further cuts in European Central Bank interest rates, ECB policymakers said.
A day after the ECB joined a host of central banks in slashing interest rates by half a percentage point, policymakers said the financial crisis would take a heavy toll on the region.
Spain's Miguel Angel Fernandez Ordonez said all 21 ECB officials had backed the move to cut the benchmark rate to 3.75% and refused to rule out a repeat in the future.
''In the short term it seems absurd but I don't rule anything out. I think yesterday's move was very important,'' he said in Madrid when asked if he saw more coordinated interest rate cuts.
Fellow rate setter Marko Kranjec was also careful to leave the door open. ''Developments will show whether other action is needed,'' he said as Austria and Slovenia became the latest euro zone states to guarantee all personal savings.
Executive Board members Lorenzo Bini Smaghi and Juergen Stark said the outlook for euro zone growth was worsening.
Bini Smaghi told business daily Il Sole 24 Ore growth was negative in the second quarter and could be negative in the third quarter as well, with risks that growth will be ''more or less flat for some quarters''.
''Our forecast for growth of 1.2% in 2009 will be revised downward. In this context, inflation could drop more rapidly to 2% by the end of 2009,'' he said.
The ECB's job description, as laid out in the Maastricht Treaty, is to maintain price stability, which the ECB defines as keeping inflation just under 2%.
Inflation is running at 3.6% and while most analysts expect it to ease as the financial crisis curbs oil and commodity prices and forces firms to chop or hold prices, some said rate cuts could allow inflationary pressures to develop.
Stark said domestic demand had weakened sharply in the second and third quarters and that the financial market crisis would probably have a bigger impact than previously expected.
''One can assume that we will see very weak growth at least for a period of several quarters,'' he told the Stuttgarter Zeitung in a preview of an interview to appear on Friday.
Stark said the concerted action was a strong, confidence-building signal and was ''completely in harmony with our mandate and our strategy''.
Finland's Erkki Liikanen also defended the decision, saying slower growth and falling oil prices had reduced price risks.
Washington decisions?
Stark said this weekend's International Monetary Fund meeting in Washington would be a time for the world's major power brokers to assess the outcome of the week's havoc but played down the chances more major measures would be agreed.
''I don't expect any spectacular results,'' he said. ''But the meeting comes at the right point in time to be able to embark on the right course.''
As well as the ECB, central banks in the United States, China, Britain, Sweden, Switzerland and Canada all cut rates on Wednesday, but the lukewarm market reaction has left the onus on this weekend's meetings to come up with solutions.
For their part analysts are looking for more rate cuts.
A Reuters poll of more than 150 economists showed that, excluding Japan where rates are near zero, central banks across the Group of Seven richest nations are all expected to cut interest rates again.
In a turnaround from previous expectation, economists now see the ECB cutting rates by another half a point to 3.25% by the end of the year. Just over a week ago most analysts had expected rates to be left at 4.25% until the start of 2009.
''Markets have been overcome by panic and hopelessness, and what we are seeing is like a bubble in reverse: it is irrational, contagious and seemingly unstoppable,'' said UniCredit Chief Economist Marco Annunziata.
''This is a bubble that policymakers should not be afraid to prick. They have to keep hitting harder, better, faster, stronger, because the next few days will be crucial.''
Reuters
