Dublin, Dec. 11 (Bloomberg) -- European Central Bank council member John Hurley said economic growth may slow next year and inflation will recede, suggesting policy makers are prepared to lower interest rates further. ``There are significant downside risks even to the projections,'' Hurley, who is also the governor of the Central Bank of Ireland, said in an interview. ``There wasn't any anxiety about inflation, with economic growth so subdued.'' The ECB pared borrowing costs for the first time in a year last week after the European Commission said the economy may shrink in the first quarter. The bank lowered the benchmark rate by half a point to a three-year low of 2.75 percent. The U.S. Federal Reserve cut its key rate to a 41-year low of 1.25 percent a month earlier.
Sliding stocks may make consumers and investors more reluctant to spend, the 57-year-old former Finance Ministry official said. ``Clearly, that's having a wealth effect and undoubtedly negating some of the other moves to try to get the economies moving.'' Europe's Dow Jones Stoxx 50 Index is down about a third this year, compared with a 15 percent drop in the Dow Jones Industrial Average. Companies including Alcatel SA, Siemens AG and Fiat SpA are firing workers to cut costs. ``The economic development will continue to be very sluggish and weak,'' Hurley said, sitting in a conference room on the seventh floor of the Central Bank of Ireland's building overlooking Dublin's River Liffey. Some investors expect borrowing costs to fall further, interest rate futures trading shows. The yield on the three-month Euribor contract for March is at 2.77 percent, compared with a money market rate of 2.92 percent. The June contract yielded 2.75 percent.
No `Bias'
ECB Chief Economist Otmar Issing and Bundesbank President Ernst Welteke said in interviews this week with the German press that the bank still has room to cut rates should further action be needed. Hurley signaled another reduction may not come soon, saying ``there wasn't any bias'' about the next interest rate move in the ECB's stance. Rates are ``appropriate for the circumstances'' and would boost business and consumer confidence, he said. Business confidence improved in France, Italy and Belgium last month. German manufacturing orders rose more than expected in October and the country's DAX index, the second-worst performer of the world's major stock indexes last quarter, has gained about 21 percent since Oct. 9.
Lower interest rates in the U.S. have spurred faster growth. The world's biggest economy, and the destination for about a fifth of Europe's exports, grew at an annual rate of 4 percent in the third quarter. The U.S. Fed left interest rates unchanged yesterday, saying the inflation and growth risks are balanced.
Inflation
The economy of the dozen euro nations will probably grow 0.8 percent in 2002 and 1.8 percent next year, the European Commission said last month. That's less than the 2 percent to 2.5 percent growth rate the ECB considers the region's ``potential growth'' -- the rate at which it can expand without fuelling inflation. The ECB council was ``content that inflation was subdued'' when it pared borrowing costs on Dec. 5, Hurley said. ``In the medium term, we were looking at inflation'' at the bank's 2 percent limit. The inflation rate in the dozen nations sharing the euro slowed for the first time in five months in November, to 2.1 percent from 2.3 percent in October. Ireland's inflation rate, at 4.4 percent in October, is highest in the region. ``Interest rates here might be a little higher'' if they were still set by national central banks, ``but my job is to look at the euro zone as a whole,'' Hurley said. ``It was inevitable with high rates of growth that you get higher rates of inflation than the European norm.'' The region-wide ECB currently sets monetary policy for Germany, France, Italy, Spain, Portugal, the Netherlands, Belgium, Finland, Luxembourg, Ireland, Austria and Greece. The 18-member governing council next meets to set interest rates on Jan. 9. //www.quote.bloomberg.com