(Adds further Hurley comment, detail)
By Jonathan Saul
DUBLIN, Dec 23 (Reuters) - The euro zone economy is contracting and will also shrink in 2009 while inflation is expected to weaken further, European Central Bank Governing Council member John Hurley said on Tuesday.
Earlier this month ECB staff sharply revised down the outlook for economic activity next year. They forecast gross domestic product would fall as much as 1 percent in 2009, having previously predicted growth of between 0.6 and 1.8 percent.
"The euro economy is contracting and will contract next year. We have also seen in the euro area inflation reduce and it's expected to reduce even further," Hurley told Irish public broadcaster RTE in an interview. "These are issues that will have to be considered very carefully by the Governing Council in the coming months."
Many economists expect euro zone inflation to fall below 1 percent during 2009 due to the drop fall in commodity prices and weak demand.
The ECB lowered interest rates by three quarters of a percentage point to 2.5 percent this month, its largest cut ever. Some analysts have been expecting it to take a pause after the recent series of cuts and leave rates on hold in January.
"While we don't pre-commit in relation to interest rates, it's absolutely clear that we are monitoring these developments very, very closely," Hurley told RTE.
Recent comments by council members have suggested the bank may be divided on the best near-term course of action.
Hurley said the global financial crisis was the worst for a century, adding that authorities and central banks had taken every action to boost liquidity and cut interest rates.
"Whatever is necessary will be done. Governments are coming together particularly in the euro area and are looking at packages to stimulate the economy and all of this will have an effect in time," he said. "But it's just simply unknown as to when that upswing will occur."
TOUGHER TIMES
Hurley, who is also Irish central bank governor, said he had been involved in the government's bank recapitalisation plan to inject 5.5 billion euros ($7.70 billion) into the country's three main banks.
"This was a difficult decision but it was a necessary decision," Hurley said.
As part of an accompanying credit package, the banks agreed to boost lending to small and medium businesses as well as to offer more funds to first-time homebuyers and assist householders with mortgage arrears.
"The commitments given by the banks to the minister for finance (Brian Lenihan) are clear -- they are clear in relation to lending to the small and medium business sector, they are clear in relation to first-time buyers and mortgages," he said.
"We do need to stabilise our financial system and our banks and to give confidence that our financial system is capable of supporting the real economy and that is in train."
A collapse in the once-thriving property market and global market turmoil helped to plunge Ireland, which had been one of Europe's economic stars, into the first recession in the euro zone this year.
The finance ministry has predicted the economy will shrink between 3 and 4 percent in 2009, making it the worst recession on record.
Commenting on the government forecast, Hurley said: "I would not disagree with that."
"It seems to me so far as next year is concerned the economy is going to contract significantly," he said. (Editing by Stephen nisbet)