POTSDAM, Germany (MktNews) - The European Central Bank (ECB) is ely to cut its key lending rate at its first meeting after the summer ess on August 30 as inflation risks clearly recede, top German ernment economic advisor Juergen Kromphardt told Market News ernational on Tuesday after a speech in this city near Berlin.
"I believe that we will see an interest rate cut on August 30. ther we will see a cut by 25 or 50 basis points largely depends on ther inflationary developments, especially in Germany," said mphardt, a member of the federal government's council of independent nomic experts, known as the "Five Wise Men".
"New data on consumer price inflation (released by German states) ever, came in better than expected in July and it appears that German is falling more rapidly than recently thought," Kromphardt added.
Kromphardt's comments came on the day the Federal Statistics Office orted that the German annual CPI inflation rate fell to 2.7% in July, ed on preliminary data, from 3.1% in June and a peak of 3.5% in May.
In his opinion, the recent decline in gasoline prices and a certain ming of price pressures caused by the mad-cow and foot-and-mouth estock diseases showed that the two main factors behind the temporary p in consumer inflation had eased.
Asked whether the ECB should cut rates in one large step instead of eral small ones, Kromphardt said a cut by 50 basis points would tainly be "appropriate" in response to the current economic weakening the eurozone.
Looking forward, Kromphardt did not rule out that further cuts of basis points might follow later in the year, admitting however, that s might also depend on the euro's foreign exchange rate.
"It might be that we will see further rate cuts, especially if the o rises above $0.90 against the dollar. Then there would be no need the ECB -- given that inflation continues to ease -- to maintain erest rates at current levels," he said.
In any case, Kromphardt said a decline in inflation would be itive, as this would allow disposable incomes to rise and thereby p spur Germany's sluggish consumer demand.
"Weak consumer spending is certainly the Achilles heel of the man economy," he said.
In this context, Kromphardt said the federal government should e up its policy of wage restraint by which wages should stay behind ductivity. Otherwise, it would be difficult to spur domestic demand the long-term, he said.
"It makes no sense in the long-term to stick to this strategy. To st consumer spending, it should be possible for wages to rise in line h productivity," Kromphardt argued.
Nevertheless, the Wise Man urged unions to continue their moderate e policy in Germany's upcoming pay negotiations next year to avoid ond-round inflationary effects.
"At the moment there are still uncertainties surrounding economic wth in Germany as well as in Europe. Although most economists expect wth to pick up in the second half, we should not forget that this elopment is closely linked to the recovery in the United States," mphardt said.