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Friday October 23, 2009

EU unlikely to fall back into recession


ECB official says economic turnaround after freefall striking

FRANKFURT: It is unlikely that the euro zone would fall back into recession soon after exiting it, European Central Bank (ECB) Governing Council member Axel Weber said on Thursday.

He also said there were no risks to price stability in the policy-relevant medium-term horizon.

“There are several factors, in the euro zone as well as in other major economies, that point to a fairly benign outlook and that make a double-dip recession very unlikely,” Weber said in the text of a speech to be given at the Israeli Presidential Conference.

He said continuing economic stimuli, improvement in confidence and absence of inflationary risks were contributing to the improved outlook. Deflationary fears had all but disappeared, Weber said.

He also said the global economic turnaround after the freefall was striking.

“We have seen a remarkable stabilisation around the world in recent months,” he said. “It is safe to say that we have overcome the worst.”

But Weber warned of undue economic optimism.

“Forecast risks are still elevated and there is no reason to be overly optimistic, given the fragility of the recovery.”

Weber, who also heads the German Bundesbank, said now was not the time to exit from measures employed to fight the financial crisis.

“Given the macroeconomic outlook, there is surely no need to rush for the exit at the current juncture,” he said.

“However, to stabilise expectations and to safeguard public confidence, it is essential to develop a credible exit framework now.”

The ECB has cut its main refinancing rate to a record-low 1.0%, offered unlimited liquidity to banks and started a 60 billion euro covered bond purchase programme to aid the ailing economy.

The ECB’s exit and monetary policy stance was determined by risks-to-price stability, Weber said, but added inflation was not a concern right now.

“Risks-to-price stability ... are fortunately currently not present at the policy-relevant time horizon.”

Inflation in the euro-zone has been negative in recent months and was minus 0.3% year-on-year in September. ECB President Jean-Claude Trichet has said he expected inflation to turn positive in the coming months.

Weber also said the ECB’s non-standard instruments allow for a flexible exit and could take financial market fragility into account, if needed.

“I am fairly confident that monetary policy in the euro area will manage an orderly exit,” he said.

Turning to financial markets, Weber said market conditions had improved but there could also be setbacks.

“Market conditions ... have improved significantly in recent months, in fact even more so than the real economy, but the situation is still fragile and temporary backlashes are likely,” he said. — Reuters


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