TOKYO (MNI) – There is no call for the European Central Bank to
alter its current monetary policy stance, ECB Governing Council member
Ewald Nowotny said on Thursday.

Briefing the press on the margins of the meetings of the IMF and
World Bank, the head of the Austrian National Bank predicted inflation
would fall next year to below 2% in the Eurozone.

“The ECB is operating on the assumption that next year we will have
a lower inflation rate in the Eurozone, under 2%,” he said. “And we see
that core inflation … even this year clearly lies under 2%.”

“It is certainly a sinking inflation rate to be expected,” he
added, even if indirect taxes and fees in some southern member states
have boosted inflation levels there.

“Direct effects on interest rates I don’t see,” Nowotny continued.

Although the ECB of course does not pre-commit, he observed, “at
the moment I see no need for a change of interest rate policy.”

Nowotny noted that while monetary policy can buy time, it cannot
ultimately replace the need for governments to act on the fiscal and
structural reform fronts.

Nowotny described the “basic mood” as being “strongly dominated by
the negative developments” as indicated by the IMF’s latest World
Economic Outlook. He noted in this context the “very strong slump”
foreseen for Italy and the downward revision to German growth next year.

“Overall we see for the world a worsening of economic
developments,” he said. In the Eurozone there is seen an “intensified
drifting apart of south and north.”

None of this simplifies the ECB’s task as central bank for the
whole euro area, he remarked.

“In all our conversations it was clear that the action of the ECB
in August was absolutely necessary and positive,” he said, referring to
the central bank’s announcement of its intention to buy sovereign debt.

This decision addressed tail risks and in particular “the
assumption of a break-up of the Eurozone” has lost its validity and “can
be considered to be ruled out,” he said.

The bond-buying program, the so-called OMT, “does not intend to
harmonize interest rates in Europe, but rather there will continue to be
differences at a national level,” he said.

“The fear of a break-up of the Eurozone should be removed” from
interest rates, he elaborated, “but beyond that, interest rates have an
important steering function and this should be retained in the future.”

As to Greece, Nowotny said that “all of us are aware that in Greece
within the foreseeable future a solution must be found. There are
ongoing talks with the Greek government, with the EU authorities, with
IMF, but it is certainly too early to say something about the result of
these talks.”

Nowotny renewed his call for caution with regard to European
banking supervision, calling for the emphasis to be put on the fact that
“quality comes before speed” even if “certain southern states” are
pushing for quick implementation of plans. Anything before the middle of
next year would “certainly” be too fast.

–Frankfurt bureau tel: +49-69-720-142. Email: dbarwick@mni-news.com

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