Frankfurt, Nov. 12 (Bloomberg) -- European Central Bank Chief Economist Otmar Issing said inflation will probably slow, suggesting he may support a reduction in interest rates as soon as next month. ``The medium-term outlook for prices has improved,'' Issing said in an interview. ``It's important to note that inflation expectations have declined'' among consumers.
His comments, in the first interview since the ECB kept rates unchanged last week, come amid pressure from politicians to match the U.S. Federal Reserve's Nov. 7 reduction in an effort to spur growth. Stagnating growth will help reduce the inflation rate, now at 2.2 percent, to below the ECB's limit of 2 percent, he said. The bank kept borrowing costs at a 2 1/2-year low of 3.25 percent last Thursday. Issing, whom analysts surveyed by Bloomberg News rated the bank's toughest inflation fighter in 1998, said the choice not to pare borrowing costs was ``definitely'' one of his most difficult rate decisions in the bank's four-year history. Policy makers balked at lowering borrowing costs last week because the inflation outlook wasn't ``so clear as to cause us to lower interest rates on that day,'' the 66-year-old banker said. ``Let's wait to see what the situation is like for example at the beginning of December'' when the ECB next meets to set rates.
``A somewhat stronger euro will continue to contribute to damping inflation,'' wage inflation has ``calmed down somewhat,'' and the weak economy will ``most certainly'' keep prices in check, Issing said in his office on the 34th floor of the ECB.
Stronger Euro
The euro rose after the ECB's decision last week and reached a 16-week high Monday, as sputtering economic growth damped demand for U.S. assets and the currency to buy them. It has risen more than 13 percent to almost $1.01 this year. The euro fell to $1.0083 from $1.0108 as of 1:57 p.m. Tokyo time. Unlike the Federal Reserve, which has also a mandate to boost employment and sustainable growth, the ECB's main task is to control inflation. The Fed, whose main rate is currently at a 41- year low of 1.25 percent, has signaled it's unlikely to cut the cost of money further. Investors expect cheaper money in Europe by the end of the year, interest rate futures trading shows. The yield on the three- month contract for December was 2.99 percent Monday, compared with a money market rate of 3.19 percent.
More than half of 22 economists surveyed before last week's decision said they expect a reduction by Dec. 5, the date of the next scheduled rate decision. Issing said the ``international environment, which is fraught with big uncertainties,'' is the main threat to the economy of the dozen nations. The question is ``whether there will be a war in Iraq, and almost even more importantly, how long will it last and what will the situation look like afterward.''
Growth Forecasts
The International Monetary Fund in September said the euro economy will grow 0.9 percent this year, compared with 2.2 percent growth in the U.S. The expansion will stall at a rate of between 0.2 percent and 0.5 percent this quarter, the European Commission said. The ECB still expects growth to return to rates between 2 and 2.5 percent in the course of the next year, Issing said. He oversees the bank's half-yearly inflation and growth projections, which are scheduled for publication next month.
``We have constant growth at a low level,'' the former Bundesbank chief economist said. ``I wouldn't call it stagnation, but it's unsatisfactory growth.'' Issing opens the ECB council's monthly meetings at 9 a.m. by presenting the key data for the region and proposing that interest rates be raised, lowered or kept unchanged.
Politicians Want Cuts
Politicians from Austrian Chancellor Wolfgang Schuessel to Germany's Hans Eichel and French Finance Minister Francis Mer have urged the ECB to help boost growth by paring the costs of money, as tax revenue dwindles and governments struggle to keep their budget deficits below a European limit. European Union finance ministers pressured France and Germany to reduce their budget deficits to give the ECB more scope to cut rates. Germany has already said its deficit this year will exceed the EU's limit of 3 percent of gross domestic product.
The endorsement of the deficit accord ``was an important signal,'' said Issing, who from 1988 to 1990 worked as an economic adviser to the government of then-Chancellor Helmut Kohl, which later designed the pact to protect the euro. ``It was absolutely decisive that the finance ministers, as a group, defended the principles'' of the budget pact, Issing said.
Accelerating growth in the M3 measure money supply, the ECB's indicator for future inflation, won't keep it from lowering rates, Issing suggested. M3 growth rose to 7.4 percent in September, from 7 percent in August, overshooting the ECB's 4.5 percent reference value for the 16th month. ``We don't see an acute inflation problem'' stemming from money supply, Issing said.//