/www.bloomberg.com/ By Emma Vandore
Brussels, Oct. 4 (Bloomberg) -- Inflation in the euro region is low enough to allow the European Central Bank to cut interest rates to stimulate growth, said Johnny Akerholm, chairman of the European Union's economic and financial committee.
In Europe ``we have lower inflation now which gives less restriction on what the central bank can do,'' Akerholm, who is also an undersecretary at the Finnish Finance Ministry, said in an interview. The committee he chairs prepares meetings of EU finance ministers and helps coordinate economic policy.
Comments from ECB policymakers suggest they aren't ready to pare borrowing costs anytime soon. Bank of Finland Governor Matti Vanhala, an ECB council member, said Wednesday interest rates are low enough to fuel growth, which the European Commission forecasts will be the slowest in almost a decade.
The ECB aims to limit inflation to 2 percent of gross domestic product, a target it has missed in 24 of the last 28 months. In September, inflation rose to 2.2 percent, boosted by the 45 percent increase in oil prices this year.
The ECB hasn't lowered borrowing costs since November, when it reduced the benchmark rate to 3.25 percent. Policy makers cut rates four times last year from 4.75 percent.
Recovery Postponed
The economic recovery that was originally expected in the second quarter of this year will take place early next year, Akerholm said. ``The upturn was postponed but there are strong reasons to believe it's going to take place.''
Still, a rebound could take longer if companies continue to lower profit forecasts, and if oil prices rise further as the probability of war with Iraq increases. The $34.6 billion U.S. annual trade gap in goods and services is also a risk, he added.
``I do not want to paint a black picture but it's always wise to keep (these dangers) in the back of the head,'' he said.
Stock markets are tumbling as companies such as Gucci Group NV and Nokia Oyj scale back their profit expectations. The Dow Jones Stoxx 50 Index fell 24 percent in the third quarter, its biggest drop since the final three months of 1987.
Falling stock markets, higher oil prices and turbulence in financial markets, particularly in South America, delayed economic recovery, Akerholm said.
Lower-than-expected growth has caused governments to borrow more as tax revenue slows or declines and lengthening jobless lines boost welfare costs. Still, this year's estimated deficit of ``about 2 percent'' for the 12 countries sharing the euro when ``compared to our history, is a marvelous figure,'' he said.
Asked if the debate about more flexible EU budget rules suggested member governments aren't taking their commitments seriously, he said: ``We have the 3 percent limit and that has not really been questioned. That is important.''