disinflationary process is, the greater of course the chance that in a certain moment people are going to react in a way we don’t want them to react

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"ECB Options to Fight Recession Include Rate Floor, Wellink Says

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By Simone Meier and Rainer Buergin

April 26 (Bloomberg) -- The European Central Bank is considering several options including a floor for its benchmark interest rate to fight the recession, said Nout Wellink, a member of its governing council.

“That’s one of the possibilities,” Wellink, who is also head of the Dutch central bank, said in an interview late yesterday in Washington. “When you have reached a certain level then you can influence reactions of economic agents by saying we will keep it at that level for a certain period.”

The ECB’s 22 council members appear split over how to counter the worst economic slump since World War II, at a time when the bank’s main rate is already at a record low of 1.25 percent. Germany’s Axel Weber has said the bank shouldn’t cut the rate below 1 percent. Others, including Athanasios Orphanides of Greece, want to keep open the option of deeper rate reductions and have argued in favor of asset purchases.

The debate prompted the Frankfurt-based ECB earlier this month to lower its key rate less than economists had forecast, by a quarter point, and to delay a decision on new policy tools until the council next meets on May 7.

The Federal Reserve and Bank of England have already cut lending rates close to zero and are buying government and corporate debt to bolster their economies. The Bank of Canada this week cut its key rate to 0.25 percent and said it plans to leave it there for more than a year.

Trichet Signals

While ECB President Jean-Claude Trichet has signaled another quarter point reduction in the main lending rate is likely next month, he has declined to comment on what new tools the bank will adopt. He said in Washington on April 24 that growth was unlikely to return “rapidly.”

Wellink said the ECB governing council is “looking into quite a number of options” without elaborating. His Belgian colleague Guy Quaden told reporters in Washington yesterday that the bank will probably lower its main rate by a “moderate” amount next month and implement unconventional monetary policies.

Quaden said he’s “pragmatic and absolutely not dogmatic” on whether the ECB should take more action beyond May. “We will have to closely monitor the risks for price stability and in the present circumstances it means the downside risks for price stability,” he said.

Wellink, who was in Washington for meetings of the International Monetary Fund and the World Bank, echoed Trichet and other colleagues in saying the recession will persist in the 16-member euro region even amid signs the economy is stabilizing. German business confidence rebounded more than economists forecast from a 26-year low in April, and consumer spending in France rose more than expected in March, data showed on April 24.

‘Less Positive’

Still, the economy may be “a little bit less positive” than than the central bank predicted in March, Wellink said. The ECB then forecast the euro region would shrink about 2.7 percent in 2009. The IMF this week projected a contraction of 4.2 percent.

The deepening slump has prompted companies to slash costs and prices, pushing inflation to less than half the ECB’s 2 percent limit. Wellink said the risk of deflation increased in recent months, yet isn’t yet a worry.

“A negative inflation rate by itself is not a problem, on the contrary it increases real disposable income,” Wellink said. “The lower and the longer the disinflationary process is, the greater of course the chance that in a certain moment people are going to react in a way we don’t want them to react. That is at this very moment not an issue.”

Other ECB officials in Washington shared Wellink’s view that a recovery isn’t yet assured. Council member Ewald Nowotny of Austria said yesterday that he sees positive signs and high uncertainty in the economy.

“At the moment, we have certainly the need for an expansionary policy,” Nowotny said.

To contact the reporter on this story: Simone Meier in Washington at smeier@bloomberg.netRainer Buergin in Washington at rbuergin1@bloomberg.net;"