Central Bank says more rate cuts likely

The governor of the Central Bank of Ireland has signalled that euro-zone interest rates could be ripe for an imminent reduction, as the European Central Bank moves to address flagging economic activity in the 12-state currency area.

In a clear statement on monetary policy, Mr Hurley said prospects for the euro-zone economy had "disimproved" since the ECB cut rates by half a percentage point last December.

He said the reduction, which left rates at 2.75 per cent, had been based on a gradual increase in growth this year, but that heightened geopolitical and international economic uncertainties had now made this improbable.

Addressing the Financial Markets Association in Dublin last night, Mr Hurley said it now seemed "certain" that growth in 2003 would be lower than expected.

The comments come less than two months after the ECB trimmed its euro-zone growth forecasts for this year by predicting that GDP could come in as low as 1.1 per cent.

"To the extent that activity remains weak, inflation could fall by more than we projected. In such circumstances, there would be some room for manoeuvre on interest rates," Mr Hurley said.

Inflation fell from 2.3 to 2.2 per cent last month, in line with the ECB's expectation that the price growth would average at two per cent this year.

Mr Hurley, who sits on the governing council of the ECB, went on to indicate that the Bank would be prepared to move quickly on rates if this was deemed necessary.

"The governing council is always ready to change rates whenever it deems such a move to be appropriate and it does not necessarily have to wait until the current uncertainties dissipate," he said.

This suggests that the market upheaval surrounding an Iraqi war would not deter the Bank from a policy move.

Most analysts agree that a cut is likely to be delivered in the first half of this year, with some expecting it to come as soon as next month.

The governor went on to reaffirm the Irish Central Bank's view that wage developments in the Republic must be "prudent" as the Irish economy struggles with inflation running at more than twice the euro-zone average.

He said inflation in the Republic, which topped 5 per cent at the end of last year, is becoming "an ever-increasing threat to our competitiveness and, hence, employment situation".

"I would reiterate, as we have stated for some time now, that this puts the onus back on prudent fiscal policy and appropriate wage and other cost developments to ensure stability," Mr Hurley said.

He also warned that a continued appreciation in the value of the euro, while helpful in bringing down inflation, would be more damaging for exporters in the Republic than for those in other euro-area states.

"Because of Ireland's stronger trading links with the US and the UK, the appreciation of the euro has a greater impact for us than it has for other euro area countries," Mr Hurley said.