Sep 26, 2011 (Bloomberg) -The European Central Bank may take further steps to support the region's economy, including cutting interest rates, if the economic outlook worsens, Estonia's Deputy Central Bank Governor Ulo Kaasik said.
While the current ECB economic forecasts don't warrant moving "very quickly" on interest rates, "if the situation changes we are ready to change our opinion as well," Kaasik said in an interview in Washington today. Kaasik, whose country joined the euro region this year, said the ECB doesn't pre- commit on interest rate decisions.
Kaasik's remarks follow indications by ECB Governing Council members Ewald Nowotny and Luc Coene in the past few days that the central bank could step up efforts to boost growth and ease financial-market tensions as early as next month. The latest ECB growth forecasts that came out Sept. 8 were made in August when not all information was available to gauge the strength of European growth, Kaasik said. Nowotny today suggested he expects further downward revisions.
European policy makers are under pressure from counterparts around the globe as their failure to contain the region's sovereign-debt crisis stokes concern the world is on the brink of another recession. The ECB started buying Italian and Spanish government bonds last month after investors demanded euro-era record yields while policy makers grew increasingly divided over the best way to fight the crisis.
Economists at Barclays Capital and Royal Bank of Scotland Plc predict the ECB will also be forced to reverse course on interest rates after it raised them twice this year to curb inflation. The benchmark rate is currently 1.5 percent, compared with near-zero for the U.S. Federal Reserve and Bank of Japan, and the Bank of England's 0.5 percent.
The ECB on Sept. 8 cut its growth forecast for 2011 to 1.6 percent from a previous estimate of 1.9 percent. It sees the economy growing 1.3 percent next year versus a previous forecast of 1.7 percent.
The ECB lends banks in the euro region as much cash as they need against eligible collateral for up to six months. Asked whether it could reintroduce longer-term bank loans with maturities of 12 months, as mentioned by Coene, Kaasik said "all options are on the table if there is a necessity."
"What is lacking is confidence, all the steps to increase confidence are welcome," he said.
Asked about the ECB's bond purchases, Kaasik said European countries have to implement as soon as possible changes to their bailout fund, agreed by European leaders in July, which are expected to be ratified in Estonia later this week.
Expand the Scope
European parliaments are focused on approving the July agreement to expand the scope of the 440 billion-euro ($594 billion) European Financial Stability Facility to allow it to buy the debt of stressed euro-area governments, aid troubled banks and offer credit lines. Its current role is to sell bonds to fund rescue loans for cash-strapped governments.
"What you do need is enough firepower for the EFSF in order to convince the market that they can do the job," he said. Whether it's through increasing its capital or leveraging it is up to governments, he said.