Channel NewsAsia

ECB fuels speculation of imminent rate cut

The European Central Bank issued another signal on Monday that it is preparing further moves to avert the risk of deflation in the 18 countries that share the euro.

FRANKFURT: The European Central Bank issued another signal on Monday that it is preparing further moves to avert the risk of deflation in the 18 countries that share the euro.

A leading member of the ECB's executive board, Yves Mersch, said that the likelihood of further action next month was increasing.

"The probability that the governing council will take action at its next policy meeting in June has increased considerably," Mersch told a conference in Munich.

The remarks back up comments by ECB president Mario Draghi earlier this month who said the decision-making governing council was "comfortable" with the idea of easing monetary conditions next month.

At this month's meeting in Brussels, the decision-making body voted to hold its key interest rate steady at its current all-time low of 0.25 per cent for the seventh month in a row.

But Draghi gave the strongest hint yet that further easing is on the cards, but would wait for the central bank's latest inflation forecasts before taking concrete action.

"In view of the currently very subdued price pressures, our key interest rates are at a very low level," Mersch said on Monday.

"We assume that interest rates will remain at this level or even lower for a prolonged period. We have other tools available to ease our money policy stance still further," he said.

"The ECB governing council is in agreement on the use of both non-standard measures and conventional monetary policy instruments to curtail the risks of inflation remaining very low over too long a period," Mersch said.

In addition to cutting key rates, the ECB could ease monetary conditions in the euro area by pumping liquidity into the banking system, or by buying up bonds.

Area-wide inflation currently stands at just 0.7 per cent, a long way off the ECB's target of just under 2.0 per cent, fuelling fears that the single currency area is on the brink of deflation.

The danger is that deflation -- a general and sustained fall in prices, could create a vicious spiral as consumers and businesses hold off spending and investment in anticipation of lower prices down the line.

Tweet Photos, Videos and Update on this Story to  #cna