MercoPress. South Atlantic News Agency

German banker freezes Euro rate cut expectations

German Bank Governing president Axel Weber warned on Wednesday that the market's consensus on interest rate expectations in the Euro zone “clearly underestimates” inflation risks and does not match the assessment of a central bank that holds price stability as its main goal.

In a speech to parliamentary members in Bonn, Weber said: "Given the background of identified risks for the future of price development and at the same time the markedly weak perspectives for the real economy, the market's present prevailing consensus of interest rate expectations, from my point of view, clearly underestimates the inflation risks". 'The interest rate expectations for the Euro zone also do not represent the monetary policy assessment of the European Central bank, which is responsible for price stability". Economists expect the ECB governing council to keep rates unchanged at its meeting next week, although most believe the bank will start cutting rates by the second quarter because data suggests the Euro zone economy is slowing. But Weber underlined the ECB main mandate is to keep price stability in the medium term. Earlier this month ECB president Jean Claude Trichet admitted that uncertainties about economic growth were "exceptionally high", which was interpreted by analysts as meaning a change in current policy towards greater monetary policy flexibilization in the Euro zone. The basic Euro rate stands at 4% while in the US they were downed dramatically by the Federal Reserve to 3%. Weber said that the EU index of consumer prices for the whole of 2008 will "probably not be below the stability level of 2" and, even for 2009, inflation will not decline "so markedly" as was projected by the ECB forecasters last December, based on lower crude oil futures prices. (ECB defines price stability as an inflation rate below but close to 2%). Weber said price pressure in the Euro area had risen last autumn with 3.2% inflation in January, which is the "highest year-on-year rate since the start of European monetary union". He said the base scenario for the Euro zone economy and price development then "appears to be somewhat moderate", with economic growth that is "only slightly below the potential trend" and a "problematic price development, which is only slowly returning to the stability areas from clearly increased levels of inflation". "But if we determined there is an appreciable upward trend, that would be for us a clear monetary policy signal to act in order to safeguard the solid anchoring of inflationary expectations", pointed out Weber. For the Euro zone economy, Weber said growth will be slightly below the potential trend but there is no danger of recession. He said a series of Euro area economic data has shown declining trends but the levels nevertheless remain high. He pointed to the unemployment figure, which he said is still at its 25-year low. On the US economy, he said the growth prospects there have become "clearly cloudy" and January data indicate the pace of growth has declined significantly. "But we do not expect a continuing significant slowing down of the US economy".