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ECB rates appropriate, but no ban on future cuts

  The European Central Bank’s main interest rate at 1% is appropriate for the current economic conditions, but rates might still be taken lower if the economy worsens, policymakers said on Friday.

They echoed ECB President Jean-Claude Trichet’s comments on Thursday after the ECB cut its main refinancing rate by 25 basis points to record low 1%, its seventh cut in a cycle which has slashed rates by 3.25 percentage points.

“What we said yesterday in the Governing Council meeting is that after the decision the current ECB rates are appropriate taking into account all available information,” ECB Governing Council member Erkki Liikanen said. “We have not taken a decision that this is the lowest level in rates we could go for.”

ECB Executive Board member Lorenzo Bini Smaghi expressed similar views on rates.

“(Trichet) has said that this is not necessarily the minimum,” Bini Smaghi told Italian television. “For the moment, we keep this level. The important thing is that banks pass the reduction on to their customers.”

Despite open opposition from some policymakers to cutting rates lower than 1%, Trichet did not rule out further cuts at the post decision news conference.

COVERED BONDS

Fellow Governing Council member Yves Mersch declined to comment on rates, but said the ECB would buy only euro-zone issued covered bonds and that the ECB would exit the non-traditional measures quickly, when inflation rears its head.

“When the (inflation) environment develops unfavorably, we can remove it quickly,” Mersch told Luxembourg’s Tageblatt. He said the covered bonds to be purchased had to be issued in the euro zone. “We offer banks liquidity against covered bonds. Thus, they have to be necessarily covered bonds which were issued in the euro zone,” Mersch told the paper.

The ECB plans to spend about €60 billion ($80 billion) buying covered bank bonds -- securities issued by banks and backed by mortgages or other loans -- but did not rule out expanding into other types of assets.

Liikanen said the ECB would decide the details regarding covered bond purchases in the June meeting, and declined to shed any light on ECB’s plans now. Bini Smaghi, for his part, said inflation was well under control in the euro zone at the moment.

“There are no concerns about inflation at the moment and this is the reason why we are cutting rates,” he said. Regarding the global economy, Bini Smaghi said there was some reason for hope on the economy. “The rate of decline should slow down in coming months. There are signs of improvement. Towards the end of the year we should see a positive sign.”

Policymakers around the world have talked about green shoots in the global economy, but many euro-zone central bankers have been cautious, saying they do not want create false hope based on single indicators.

Trichet said on Thursday confidence building was key in green shoots sprouting. “We have to be realistic, it is a stabilization at a low level and we continue to be in negative territory,” he said. “It depends on our capacity to improve the level of confidence of all economic agents that these green shoots will be greener and greener.” (Reuters)