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FRANKFURT, Dec 17 (Reuters) - It would not be a major problem if euro zone interest rates briefly dropped below 2 percent, European Central Bank Governing Council member and Bundesbank chief, Axel Weber, was reported as saying on Wednesday.
In an interview with news agency Dow Jones, Weber said that the ECB needed to tread carefully if it cut interest rates below its previous all-time low of 2 percent, but that it would not be a major issue if it was only for a short time.
"I wouldn't cry wolf if, in a situation of very low inflation and positive real rates, nominal rates would briefly fall below 2 percent," Dow Jones quoted Weber as saying.
It marks a subtle change of tone. Financial markets cooled expectations of an ECB January rate cut last week after Weber and ECB Executive Board member Juergen Stark both said there was limited scope for the ECB to add to recent three-step 175 basis points slashing of rates (for story please click [ID:nLB692094])
The head of the Bundesbank said that at least one of the two caveats for cutting rates was likely to become reality, saying that falling energy prices meant inflation may turn "slightly negative" for a short period of time next year.
Euro zone inflation is indeed falling fast. Official data on Wednesday confirmed that it fell to 2.1 percent in November, half of what it was over the summer and within touching distance of the ECB's target of just under 2 percent. (For story please click [ID:nLH23833]).
Weber also warned that the prognosis for the economy had deteriorated since the start of the month.
"We've highlighted downside risks to growth, and news out since our latest projections indicate that some of those risks have started to materialize," he said.
He also voiced opposition to recently floated suggestions for ways to spur money markets back into action.
He said that the "disadvantages outweigh the advantages," in plans for a central bank guaranteed money market clearing house and played down speculation that cutting the ECB's overnight deposit rate could wean banks off the practice of hoarding spare cash at the central bank.
"An isolated reduction in the deposit rate would mean that we'd render control over short-term money market rates that, without any additional liquidity fine tuning operations, would risk falling way below the main refinancing rate," Weber said
(Reporting by Marc Jones; Editing by Ron Askew/Victoria Main)