July 21 (Bloomberg) -- European Central Bank council member Ernst Welteke said there's no reason to lower borrowing costs for now because three interest rate cuts in the past eight months should be enough to spur an economic recovery. ``I see no need to act at the moment,'' said Welteke in a televised interview with Bloomberg News in Frankfurt. ``The conditions are there for stronger growth'' in the dozen countries sharing the euro. The ECB last month lowered its benchmark interest rate to 2 percent, the lowest for any of the euro nations in more than half a century. Growth in the region's $7.8 trillion economy may stagnate in the second and third quarters of this year, the European Commission said this month. Welteke's comments echo those of ECB President Wim Duisenberg and Bank of Greece Governor Nikos Garganas, who said this month that rates are low enough to boost growth this year. The ECB expects the euro region's economy to grow between 1.1 percent and 2.1 percent next year after expanding as little as 0.4 percent this year.
``Their economic forecasts will prove to be too optimistic,'' said Lothar Hessler, deputy head of research at HSBC Trinkaus & Burkhardt KgaA in Dusseldorf. ``Sooner or later they will cut rates.'' The ECB next meets to decide on rates on July 31. Investors have scaled back expectations for another reduction, interest rate futures trading shows. The rate on a three-month Euribor contract maturing in December was at 2.02 percent at 11:23 a.m. in Frankfurt, up from 1.94 percent two weeks ago. The current money market rate is at 2.13 percent.
`Room for Maneuver'
Economic reports are sending mixed signals about Europe's economy. German business confidence exceeded economists' forecasts in June. By contrast, European manufacturing shrank for the ninth time in 10 months. ``On the margins, there are a few signs of improvement, but you certainly can't say that the turnaround has been achieved,'' said Welteke, who also heads the Bundesbank. ``Theoretically, we always have room for maneuver'' should an economic recovery fail to materialize, Welteke said. The German economy failed to rebound in the second quarter from a contraction in the previous three months and there are no signs to suggest a recovery soon, the Bundesbank said today in its monthly report. Europe's largest economy last year grew 0.2 percent, the slowest pace among the dozen euro nations.
Inflation to Slow
The ECB predicts inflation will slow to below its 2 percent ceiling next year, partly as sputtering growth makes it harder for companies to raise prices, giving it the leeway to lower rates further. Welteke said the bank expects the inflation rate to drop to around 1.5 percent next year from currently 2 percent. The ECB may be more willing to reduce borrowing costs after its internal staff projections are completed in September. The bank's last three rate cuts came after it pared growth forecasts. Still, Duisenberg has said the ECB has ``done its part'' to boost the economy and that governments should do more to loosen their labor markets and make investment more attractive. The ECB has reduced its benchmark rate by 125 basis points to 2 percent in the past seven months. ``Why should further rate cuts have a positive effect?'' said Welteke, who was speaking at the Frankfurt stock exchange. The ECB's benchmark rate remains 1 percentage point above the U.S. Federal Reserve's overnight lending rate even though the world's largest economy will likely outstrip Europe's in the third quarter. Low rates, rising stock prices, tax cuts and the end of the Iraq war ``should bolster economic activity over coming quarters,'' Fed Chairman Alan Greenspan said last week.
Illogical Stock Gains
Welteke cast doubt on the justification for recent stock market gains in Germany. The country's benchmark DAX Index has surged 53 percent since dropping to a seven-year low in March. ``A double-digit increase in the DAX index inside one year is outside logic -- why should DAX companies become so much more valuable in such a short time in an economy that's hardly growing,'' he said. ``On the other hand, it also signals optimism among market participants and is surely also a sign that companies have largely done their homework.'' European stocks declined after Welteke's comments. The Dow Jones Stoxx 50 Index slipped 0.6 percent to 2389.35 at 12:14 p.m. in Frankfurt. //www.bloomberg.com