Matthew Vella
Suggestions by Central Bank Governor Michael Bonello that interest rates would not have to be lowered in the ensuing global financial crisis, were given short shrift earlier this week when the European Central Bank (ECB) rushed to cut rates by 0.5%.
Comments by Bonello to Bloomberg News in late September expressed confidence that the eurozone’s economy was expected to recover by the end of the year, a comment seemingly ignored by Finance Minister Tonio Fenech.
A spokesperson told MaltaToday that the minister’s priority at the moment was “to keep monitoring the present international crisis” – suggesting little interest to comment on Bonello’s positive assessment.
Bonello, who is an ECB member, was quoted by Bloomberg News saying that by the end of 2008, “we should be out of the lowest point, at least past the trough” and that inflation risks were “all on the upside” – suggesting the risk of increasing prices was less urgent than the greater risk of economic recession.
Bonello’s comments came after the collapse of Lehman Brothers and the nationalisation of US insurer AIG, and as business confidence indicators in Germany, France and Italy plunged to their lowest levels in years.
But although he suggested there would be no need to lower interest rates, earlier this week the ECB made a substantial cut in interest rates of 0.5%, suggesting that matters could have changed quickly inside the Frankfurt headquarters.
The cut is expected to ensure a greater availability of credit, which in turn would stimulate the economy by pumping more money into the system, and keep the banking system well-oiled.
A lower interest rate will also ease pressure on mortgage payments for homeowners, and leave more money in people’s pockets.
In the same news report, German economist Gernot Nerb, from the Ifo Institute, quipped that he wasn’t expecting “a silver lining” by the year’s end.
Bonello, who said he didn’t rule out that the economy may shrink again in the current quarter, said he felt there was still “a certain degree of resilience to the setbacks which the current turmoil would imply”.
A Lloyds TSB economist however said the European Central Bank “shouldn’t be so relaxed”.
“The numbers suggest the slowdown might be more protracted and the recovery might be delayed,” Kenneth Broux said.
Bonello did not exclude that inflation would fall back to below 2% in 2009, “but only if oil prices stabilise and if we don’t have any further negative surprises. Given the many sources of upside pressures, I feel more confident in saying that inflation should drop toward the 2% threshold in 2010.”
mvella@mediatoday.com.mt