LUXEMBOURG (MNI) – The monetary policy of the European Central Bank
is still accommodating, and it will be adjusted — as will the ECB’s
special liquidity measures — as the situation permits, Governing
Council member Yves Mersch said Friday.

The head of the Luxembourg Central Bank (BCL) cautioned in the
editorial of his bank’s latest bulletin that even Luxembourg’s fiscal
situation is not immune to sudden deterioration a la Ireland, though he
predicted the Irish would pull through with the help of iron budgetary
discipline.

“Overall, the current orientation of monetary policy remains
accommodating in the Eurozone,” Mersch said. “This orientation, just
like the provision of liquidity and the modes of allotment, will be
adjusted in function of the situation, taking into account the fact that
the non-conventional measures adopted in the course of the period of
high tensions on the financial markets are of a temporary nature.”

“The Governing Council will thus continue to follow very
attentively all developments in the course of the coming period,” he
added.

Turning to fiscal affairs, Mersch warned that “the budgetary
situation of an open economy like that of Luxembourg can rapidly
deteriorate for lack of sufficient vigilance, as the situation of
Ireland shows.”

However, he said he was “convinced that Ireland will manage to
extricate itself from these difficulties” — though not without
implementing a very strict program of budget reform.

“Our policymakers would be well advised to avert all risks in this
matter by reinforcing as quickly as possible the fundamentals of the
Luxembourg economy,” he added.

Elsewhere in the bulletin, the BCL assured that medium- and
long-term inflation expectations in the Eurozone are solidly anchored in
line with price stability.

“Nonetheless,” it observed, “disinflation could have reached its
apogee and inflation will probably not retreat anymore in the course of
the coming months.”

The central bank reiterated the ECB’s view of risks to the outlook
for price stability as being “overall balanced” and including — on the
upside — the prices of energy and other raw materials as well as
indirect taxes and administrative prices.

“At the same time, the [ECB's latest] forecasts still consider
[there are] limited risks surrounding the evolution of internal prices
and costs,” the BCL affirmed.

The BCL’s assessment of prospects for growth also conformed to last
Thursday’s monthly ECB press conference. “Data and recently published
survey results generally confirm the opinion that the underlying
positive dynamic of the recovery of the Eurozone continues,” the BCL
said.

Growth in the euro area should remain “moderate,” however, compared
to previous economic recoveries, the bulletin said. Private consumption
should register a clear pick-up this year and then increase
progressively over the forecast horizon.

Exports in 2010 should “rebound strongly,” only to slow a bit
thereafter, the BCL predicted. The contribution of trade to growth
should thus decline over the forecast period, though still remain
positive.

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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