The European Central Bank (ECB) looks set to cut interest rates next month after its Monthly Bulletin for November predicted that inflation would ease in the medium term.
Yesterday's report follows remarks by senior ECB officials signalling that the first interest rate cut for more than a year could come when the ECB's Governing Council meets on December 5th.
Most analysts are now convinced that a cut is imminent and many believe the ECB will cut rates by as much as 0.5 per cent.
The Governing Council was divided this month over whether to cut rates after the Federal Reserve cut US interest rates by half a percentage point to 1.25 per cent. Yesterday's report suggests that an easing of inflationary pressures in the euro zone will give the ECB an opportunity to act next month.
"Overall, the subdued trends in economic activity and the stronger exchange rate of the euro support the view that medium-term inflationary pressures should decline," the report said. The report dismissed fears of a credit squeeze, despite difficulties faced by many companies, especially in Germany, in raising capital.
The ECB believes such problems are due to economic uncertainty, which makes banks cautious about lending money, rather than a general lack of liquidity.
"In the euro zone as a whole, the annual rate of growth in loans to the private sector is at present relatively close to its long-term historical average," the report said.
The Bundesbank president, Mr Ernst Welteke, said this week that the bank was working on the assumption that inflation would fall and was keeping a close eye on the downside risks in the economy. "Reading between the lines, that could look as though the interest rate path was headed downwards," he said.
The ECB's chief economist, Dr Otmar Issing, who is considered one of the most hawkish members of the Governing Council, said the euro-zone inflation outlook had improved, adding that the situation had not been clear enough to persuade the ECB to lower rates now, but that it would look into the situation again in December. The ECB has been criticised for failing to communicate its intentions clearly to the financial markets.
But yesterday's report claimed that its communications strategy was characterised by honesty, openness and clarity. "The effectiveness of this approach can be seen in the fact that policy moves by the ECB have generally been well understood and anticipated by the markets," the report said.
