European Bank Official Calls Rate Cut Possible

A top European Central Bank policymaker said Monday that an interest rate cut couldn’t be ruled out, throwing support to politicians rattled by voter anger over slow European growth and talk of a euro zone breakup.

Chief economist Otmar Issing, usually the toughest central bank official on inflationary risks and the futility of cutting record-low rates to boost growth, told a German business newspaper that the European Central Bank’s monetary policy strategy “does not rule out” a cut in rates.

That was a marked shift from three days earlier when he, like central bank President Jean-Claude Trichet, avoided direct talk of a possible rate cut after the bank’s last meeting.

The ECB’s key short-term rate is 2%, compared with 3% for the U.S. Federal Reserve’s benchmark rate.

The softening tone suggests that the central bank increasingly is worried about damage to the Continent’s monetary union. The French and Dutch “no” votes on the European Constitution last week were blamed partly on rising unemployment and a weak economy since the euro’s launch in 1999, and spurred talk of the single currency bursting apart.

In recent days, two Italian ministers have proposed that the country should quit the monetary union, and newspapers in Spain and Germany have highlighted citizen discontent with a currency that many say has failed to improve their lives.

An interest rate cut could help calm some of the anti-euro talk, analysts said.

But German Bundesbank President Axel Weber said cheaper money would not necessarily help. “Currently in Europe we have historically low interest rates. This is not a reason which explains why investment has not taken off in the euro zone,” he said in a speech in Bonn.

European stocks were marginally lower Monday despite the rate comments, but bond markets continued to rally. The yield on 10-year German government bonds fell to a generational low of 3.22% from 3.24% on Friday.