ECB :Speculation on rate cuts is wild

Speculation of a sharp cut in Euro-zone interest rates next month is "wild", European Central Bank policymaker Yves Mersch said Monday, but colleague Ewald Nowotny said cuts could not in general be ruled out. European stock markets surged Monday on the idea that the bank could slash its 1.5 per cent main rate by a half-point on October 6, taking back rises it made earlier this year in a bid to dig the European economy out of a deepening crisis. There are substantial barriers to it doing so, however, not least that the meeting would conclude ECB President Jean-Claude Trichet's term of office with a dramatic U-turn. "These wild expectations only show that some people have lost the north," Mersch told news agency Market News International in an interview conducted on Saturday. "We have one needle in our compass." Policy horizon The phrase is often used by ECB policymakers to refer to them abiding by the central bank's mandate of keeping inflation below, but close to 2 per cent. Euro zone inflation stood at 2.5 per cent in August although it is expected to drop off over the policy horizon the bank uses to guide rate decisions. European policymakers have begun working on new ways to stop fallout from Greece's near-bankruptcy from inflicting more damage — some fear the fallout could match or exceed that of the 2008 collapse of Lehman Brothers. ECB officials signalled on Friday that the bank could be set to restart to offer banks 12-month funds in its liquidity operations to help banks struggling with their fund-raising. Analysts read Nowotny's comments as opening the door to a cut in headline rates as well — although his language used neutral wording policymakers often use to avoid giving a clear steer and gave no indication of timing. "The ECB never pre-commits, and rate cuts cannot be excluded," Nowotny, who also heads the Austrian National Bank, told news agency Market News International.