By Marilyn Gerlach
TUEBINGEN, Germany, Dec 10 (Reuters) - The European Central Bank does not have a lot of room for maneuver after its interest rate cut last week and any further reductions could be done only in small steps, ECB Executive Board member Juergen Stark said on Wednesday.
Speaking at a university symposium, Stark said: "After this substantial rate cut, the remaining room for manoeuvre is very limited, potentially allowing for small steps only." Since Oct. 8, the ECB cut its rates three times with an overall reduction of 175 basis points, with the last cut made last week.
Stark said the 75 basis-point cut last week had taken into account that the inflation rate will decline further in quarters to come and that inflation risks are on the downside for the medium term.
Stark said the ECB had made it very clear that the decrease of 175 basis points within two months is exactly what is appropriate in light of all available data.
"New relevant information for the euro area which allows for a serious reassessment of the outlook for price stability will very likely not be available before February or March 2009," Stark said.
Stark stressed the mandate of the ECB is to maintain price stability over the medium term.
"The monetary policy stance appropriate to fulfill the ECB's mandate depends exclusively on its assessment of the balance of risks to price stability, and nothing else," he added.
He noted the significant intensification of the financial crisis since mid-September has greatly affected the outlook for short-term economic growth in the euro area.
"After two negative quarters of economic growth, GDP growth in the fourth quarter 2008 and in the coming quarters will be very weak," he said.
He said the ECB staff projections, which were released last week, had significantly revised down the June forecasts and "uncertainty surrounding the projections is particularly high at this juncture."
The ECB staff last week had forecast 2009 euro zone growth at a range of minus 1.0 percent and 0.0 percent and for 2010, at a range of 0.5 percent and 1.5 percent.
He said the European Commission forecast growth near zero in 2009 and quarterly growth rates to remain very low until the second quarter of 2010, while the IMF and the OECD see the euro area in recession in 2009. "Uncertainty is extremely high and risks are further to the downside," he added.
He said the depth and duration of the global economic downturn will crucially depend on the development of the financial crisis. "At the current juncture, market volatility and uncertainty remain extremely high," he said.
"Global inflationary pressures are easing due to the global economic downturn and falling commodity prices. All in all, the global inflation outlook has improved," he added.
Stark said that inflation most recently has substantially declined, with a 2.1 percent reading in November.
"In this process of disinflation we might even see negative inflation rates for a couple of months in some regions of the euro area.
"Over the policy-relevant horizon, inflation rates are expected to be in line with price stability, supporting the purchasing power of incomes and savings," he added.
He said the ECB staff projections foresee annual HICP inflation rates of between 3.2 and 3.4 percent for 2008 and at between 1.1 and 1.7 percent for 2009.
"Monthly inflation is expected to reach a trough in summer before rebounding again at the end of 2009," he added.
He said said some analysts discuss the risk of deflation but this term should be used with caution and not be mixed up with disinflation.
"It should be stressed that risks appear very limited given the continued anchoring of longer-term inflation expectations at levels consistent with price stability, wage and price stickiness and the still sustained pace of monetary dynamics," he said.
Stark pointed out that monetary trends support the view that "inflation pressures are diminishing further, with some risks remaining on the upside in the medium to longer term."
"So far, the hard data does not support the view of a drying up in the availability of loans," he added. (Editing by James Dalgleish)