ECB should keep cutting rates in small steps, Kazimir says

FRANKFURT (Reuters) – The European Central Bank should continue to cut interest rates in small steps and resist the temptation of trying to prop up growth in a currency bloc that suffers largely from structural faults, Slovak policymaker Peter Kazimir said on Monday.

The ECB cut rates by 25 basis points to 3% last week but some policymakers pushed for a bigger step on the premise that growth is especially weak and inflation could even undershoot the ECB’s 2% target in the medium term.

“Maintaining a gradual, step-by-step approach through 25 basis point rate cuts continues to be the most prudent strategy,” Kazimir, an outspoken policy hawk, said in a blog post.

“A more aggressive monetary easing would require a dramatic shift in conditions to justify it,” Kazimir added.

The ECB last week lowered its growth forecast for the 20- nation euro zone and said that risks were still skewed to even more negative outcomes, especially if the new U.S. administration introduces trade barriers.

But Kazimir said laxer monetary policy was merely a band aid for deeper structural faults and not a real solution.

“Lower interest rates can provide breathing space, but they cannot replace the vital reforms,” he said. “Europe’s economic malaise is largely structural and demands solutions that extend beyond the remit of monetary policy.”

“We must resist the temptation to overreact to short-term pressures,” Kazimir said.