Bundesbank president Ernst Welteke has said the European Central Bank (ECB) has, in theory, room to move to cut interest rates, but whether it uses this room will depend on the inflation outlook. Speaking in an interview with the Financial Times (FT), Welteke said, "In theory, there is still room to move (on rates). Whether the bank uses this room depends on the outlook for inflation". He suggested the ECB was leaving itself some room over interest rates amid fears that a prolonged war in Iraq could drive up oil prices and deliver a damaging blow to the eurozone economy, the FT said.
But Welteke, a member of the ECB's governing council, also said liquidity in the eurozone was "abundant" and the current level of interest rates at 2.75pc was no obstacle to higher growth. Another interest rate cut might only increase liquidity "to no positive effect", he said. Over the longer term, another cut might also increase the risk of higher inflation, he said. "This would have to be carefully considered in the light of future developments." Welteke acknowledged, however, that the risks to price stability are balanced while the risks to growth are "more on the downside". //www.fxcentre.com