EUROPEAN Central Bank council member Yves Mersch said yesterday that the bank couldn't afford to cut interest rates this year with inflation likely to breach its 2 percent limit in 2009.
The ECB predicts inflation will exceed 2 percent this year and next and "I wouldn't rule out that we will have to revise upward our inflation profile," Mersch, who heads Luxembourg's central bank, said in Washington. Asked if he agreed with the International Monetary Fund that the ECB had scope to lower rates, he said: "Certainly not within the time horizon we're talking about for the current year."
Mersch is the latest policy maker to suggest in Washington that the ECB will ignore the IMF's advice to follow the United States Federal Reserve and the Bank of England in cutting interest rates to bolster economic growth, Bloomberg News said.
The Frankfurt-based ECB last week left its benchmark rate at a six-year high of 4 percent, even as a looming US recession, record oil prices and the euro's appreciation threaten to choke economic expansion.
The euro rose to US$1.5791 at 12pm in Frankfurt from US$1.5708 before Mersch's remarks were published. The difference between two and 10-year bond yields increased to 52 basis points, the widest since March 19.
The ECB remains focused on fighting inflation, which accelerated to 3.5 percent in March, a 16-year high. The bank currently forecasts inflation will average about 2.9 percent this year and 2.1 percent in 2009.
Germany's Axel Weber said last Friday that he didn't see "any room to cut rates," and Finland's Erkki Liikanen said on Saturday that ECB must bring inflation below 2 percent within 18 months.
Banks and securities firms have so far posted about US$245 billion in asset writedowns and credit losses in the current financial crisis.