By Boris Groendahl and Sakari Suoninen
VIENNA/HELSINKI, Dec 9 (Reuters) - The European Central Bank's record interest rate cut may not mark "the last word" in monetary easing, an ECB policymaker said on Tuesday, but he and colleagues refused to commit themselves to further action even though the global economy faces at least a year of recession.
ECB Governing Council members predicted that euro zone inflation would keep falling and said the global economy might perform even worse than currently forecast.
But they played down the risk of deflation and said the euro zone faced a recession similar to those in the 1990s and 2001, rather than a global economic crisis like in the 1930s.
The ECB cut its benchmark rate by 75 basis points to 2.50 percent last Thursday, its third reduction since early October and the largest it has made since the euro zone's creation almost a decade ago.
Governing Council member Ewald Nowotny, echoing recent comments from other ECB policymakers, signalled that the bank has room for further action.
"The ECB has always aimed to have some downward room for manoeuvre ... 2.5 percent does not have to be the last word. We have to look at further developments," said Nowotny, who heads the Austrian central bank.
The euro zone economy is already in recession and ECB policymakers were gloomy about the wider outlook. Governing Council member Vitor Constancio of Portugal said he expected a global recession throughout at least 2009, with a slow recovery possible in 2010.
"The situation of recession and weak growth will be relatively prolonged and in 2010, in spite of a recovery, the recovery will be slow," he said. However, he refused to be drawn on what further action the ECB will take. "The evolution of the economy will dictate future interest rates," he said.
ECB staff last week sharply revised down forecasts for euro zone GDP next year, giving a range of a 1.0 percent fall to no change, compared with a previous forecast of 0.6-1.8 percent growth. For 2010 they predicted weak growth of 0.5-1.5 percent.
However, Nowotny said he would not rule out further cuts to global economic forecasts in general.
MARKED WEAKENING
"I am not sure, and I cannot promise, that there will not be further downward revisions," he said. "The downward risks are seen as much bigger than the upward risks. This means effectively that we see a very marked weakening."
Governing Council member Erkki Liikanen echoed these comments. "There are still downside risks to growth, as the final impact of the financial market crisis on the rest of the economy remains hard to assess," said Liikanen, who also heads the Bank of Finland.
The global outlook has deteriorated exceptionally quickly, he told the Bank of Finland's quarterly news conference, and countries which can afford to stimulate the economy should do so, even if this will be no panacea. "Economic policy can soften the downturn, but it cannot prevent it," he said.
Nowotny saw a bad downturn but not a full-blown crisis. "What we are seeing is equivalent to the 1993 and 2001 periods of recession," he said. "This means that it is a clear and deep recession, but it is completely excessive to compare it to the 1929/1930 economic crisis. It is a challenge but a manageable challenge."
On the positive side euro zone inflation is set to fall further. It slowed to 2.1 percent year-on-year in November, close to the ECB's target of close to, but below 2 percent.
Liikanen saw a further drop but played down the danger of deflation, a sustained and widespread fall in consumer prices which can hurt economies badly.
"Inflation is set to slow in the coming months in the euro zone," he said. When asked about the risk of deflation in the euro zone, Liikanen said: "We are forecasting inflation for next year and also 2010."
In Germany, analyst and investor sentiment on the outlook for the region's largest economy improved in December, aided by falling oil prices and interest rate cuts, raising hopes that the recession may come to an end by 2010.
The Mannheim-based ZEW economic think tank's monthly poll of economic sentiment unexpectedly rose for a second straight month to -45.2 from -53.5 in November, the institute said on Tuesday.
ECB Executive Board member Lorenzo Bini Smaghi said in Beijing that the rise was good news. "It's a bit of a volatile indicator, but it's in a positive direction," he said.