Options open on ECB rate cut, October talk "wild"

Tue Sep 27, 2011 10:48am EDT
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By Marc Jones and Martin Santa

WASHINGTON/FRANKFURT (Reuters) - European Central Bank officials said on Monday they were keeping their options for a rate cut open, lifting markets, even as Luxembourg's Yves Mersch warned speculation of a sharp move next month was "wild."

European stock markets surged on the idea the bank could slash its 1.5 percent main rate by a half-point on October 6.

There are substantial barriers to it doing so, however. Not least that the meeting would conclude ECB President Jean-Claude Trichet's term of office with a dramatic U-turn.

"These wild expectations only show that some people have lost the north," Mersch told news agency Market News International in an interview conducted on Saturday, when asked about interest rates. "We have one needle in our compass."

The last phrase is often used by ECB policymakers to refer to them abiding by the bank's mandate of keeping inflation below 2 percent.

Euro zone inflation stood at 2.5 percent in August although it is expected to drop off over the policy horizon the bank uses to guide rate decisions.

In an interview with German daily Boersen-Zeitung published later, Mersch said rate cuts could be considered if the economic situation worsened considerably more than expected.

"Interest rate cuts are not completely ruled out," he was quoted as saying. "Should there be, compared with current data, a significant worsening of the dynamics of the economy in the euro zone, we do have room to move."   Continued...

<p>A cyclist rides past the European Central Bank (ECB) headquarters in Frankfurt, August 4, 2011. REUTERS/Ralph Orlowski</p>