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ECB's Praet, wary of growth risks, says could cut rates again

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(Globalpost/GlobalPost)

MILAN (Reuters) - The European Central Bank could cut interest rates further, senior policymaker Peter Praet said, adding that uncertainty about the global economic outlook risked leading to renewed market tensions.

The ECB earlier this month said it would keep interest rates at record lows for an extended period, seeking to reassure markets unnerved by signals from the U.S. Federal Reserve on winding down its stimulus program.

The strategy helped persuade markets that the ECB is not about to follow the Fed and begin exiting its ultra-loose policy stance, though ECB policymakers' subsequent qualification of the forward guidance risks undoing this 'decoupling' effect.

Praet, who begins ECB Governing Council meetings with a presentation that forms the basis for discussion, stressed the ECB's capacity to loosen policy further in an interview with an Italian newspaper published on Tuesday.

"Our base interest rates could be lowered further, as clarified by our forward guidance message," Praet told Corriere della Sera.

"Furthermore, as a non-standard measure, we continue with offering banks unlimited liquidity," he said.

At their July 4 meeting, ECB policymakers discussed cutting interest rates, though decided against doing so. The ECB's main refinancing rate stands at a record low of 0.5 percent and the deposit rate it pays banks for holding their cash is at zero.

Striking a dovish tone, Praet listed a string of risks to the global economic outlook, which he said the ECB was watching closely.

He said there were question marks over growth in some emerging countries, like China and Brazil, where growth has been driven by a boom in credit and raw materials. An improvement in the United States was leading to a repricing in the bond market, which could lead to "a tightening in financial conditions".

"Markets tend to exaggerate. When markets readjust their economic cycle scenarios, it is always a very delicate moment, volatility can be high and uncertainty can grow," he said.

In the euro zone, Praet said downside risks were mostly tied to difficulties in the implementation of structural reforms in certain countries, even though there have been some positive signals, such as the improvement in confidence in some nations.

He urged governments and Europe to implement reforms as soon as possible to avoid new tensions on financial markets.

The ECB Council holds its next policy meeting on August 1.

(Reporting by Danilo Masoni; Writing by Paul Carrel; Editing by John Stonestreet)

http://www.globalpost.com/dispatch/news/thomson-reuters/130723/ecbs-praet-wary-growth-risks-says-could-cut-rates-again