ECB's Mersch Expects Euro-Zone Slowdown: Report

There are downside risks to euro zone growth and the European Central Bank will remain flexible on interest rates, Governing Council member Yves Mersch was quoted as saying on Wednesday.


News agency Bloomberg said Mersch could not rule out the ECB's staff forecast for growth of 1.5-2.5 percent this year being revised down in March, and quoted him as saying growth should be close to "but below" its potential rate of about 2 percent this year.

"We have certainly downside risks to economic activity," Mersch said in the interview, conducted earlier this week.

"There will be a moderation of growth inside Europe."

Mersch was also reported as saying risks to euro zone inflation were also increasing but traders and economists took his comments as a sign of softening in the ECB's tough talk on inflation.

The ECB has kept rates at 4 percent since last June but has said it is prepared to tighten credit costs to head off a wage-price spiral.

After Mersch's comments, the euro (EUR-) fell one percent against the U.S. dollar and euro zone interest rate futures jumped as traders increased bets the ECB will be forced to follow other major central banks and cut interest rates.

Euribor contracts rallied sharply to trade as much as 16 ticks higher on the day across the 2008 strip (0.FEI:), indicating that traders now expect around 40-45 basis points of ECB easing by the end of the year.

"Given the usual hawkish stance historically adopted by (Mersch), today's comments may be taken as a first signal that the ECB's current hawkish stance may shift over the next months provided that inflation recedes and growth fears keep mounting," Aurelio Maccario, co-head of European economics for UniCredit, wrote in a note to clients.

Mersch was quoted as saying the ECB will act "if needed. But we will keep all flexibility in order to assess whether there is a need at each meeting of the Governing Council." The bank has "not taken a decision" to raise rates yet, Bloomberg reported him as saying.

"We have sound economic fundamentals," he said.