By Robin Pomeroy
ROME, Oct 31 (Reuters) - ECB Executive Board member Lorenzo Bini Smaghi warned on Friday against setting interest rates too low and the Bank of Italy chief said there was limited scope for using monetary policy to boost the economy.
The cautious comments from Italy's two ECB Governing Council members came ahead of a European Central Bank meeting on Nov. 6 where bank President Jean-Claude Trichet has said a rate cut is "possible".
Economists polled by Reuters expect a half percentage point rate cut to 3.75 percent. It would follow the recent global trend. After a cut by the U.S. Federal Reserve earlier in the week, Japan cut interest rates for the first time in seven years on Friday to 0.30 percent. The Bank of England is expected to follow suit too.
Belgian Central Banker Guy Quaden reinforced expectations for an ECB cut. "The ECB meets next week and another rate cut is a possibility," he told business daily De Tijd.
But Bini Smaghi, who has also said a cut next Thursday is a "possibility", injected a note of caution. "Let's remember that interest rates in the previous (economic) cycle remained very low, perhaps they got too low in an effort to stimulate the economy at all costs," Bini Smaghi said at a conference at the Luiss University in Rome.
"We must avoid repeating the same mistake, of bringing rates down to levels that are difficult to get out of."
Bank of Italy Governor Mario Draghi said rate cuts made by central banks around the world, aimed at countering the financial crisis, had made a positive impact but said there was not much more room for manoeuvre.
"The quick loosening of monetary policies contributed to containing the repercussions of the financial turbulence on the real economy," Draghi told an audience of bankers in Rome.
"The commitment remains, but given the low level of interest rates now in the U.S. and the ample liquidity made available by central banks, monetary policy's room for manoeuvre tends to be reduced," he said.
Expectations of a rate reduction were boosted by data showing euro zone inflation fell to 3.2 percent in October as oil and other commodity prices helped inflation ease from September's 3.6 percent, in line with forecasts.
It is likely to cheer the ECB who will see it, alongside dire recent economic figures, as further justification for lower rates.
Draghi, who is also chairman of the Financial Stability forum, said despite some positive elements like improving credit conditions, the world economy would remain in the doldrums until at least the second half of 2009.
"Based on the evolution of global demand, as expected by major international bodies, ongoing stagnation will continue at least until half of next year," he said. (Additional reporting by Giselda Vagnoni and Tiziana Barghini in Rome, Philip Blenkinsop in Brussels; Editing by Andy Bruce)