The eurozone is heading for a prolonged period of anaemic
growth and is blighted by excess capacity, a member of the
European Central Bank board member said on Tuesday, ahead of
its monetary policy meeting on Thursday.
There has been an improvement from a low [base] but it
is very likely that the recovery will be sluggish, said
Erkki Liikanen, a member of the ECBs Governing Council,
said in an interview with Emerging Markets in Istanbul
His comments strongly suggest the ECB will keep rates on
hold at its October 8 interest rate meeting and caution that
the risks to the global economy remain on the downside.
All central banks need to prepare for our exit
stimulus strategies but monetary authorities can not say
when they will do this, the Finnish central bank
With weak growth prospects and inflation expected to be low
in the medium-term, Liikanen suggested a withdrawal of
liquidity measures and monetary tightening would be
There are excess capacities in the economy and
unemployment is still going up and this has impact on private
consumption and investment, he said.
Over the past year, the ECB has sliced 325 basis points from
its main refinancing rate. The ECB meeting marks the first
anniversary of the coordinated interest rate cuts by major
central banks after financial catastrophe that was triggered by
the mid-September collapse of Lehman Brothers.
He said a significant increase in capital raising by banks
was a necessary but insufficient condition for financial
stability, suggesting interest rates may be kept low to allow
banks to issue equity.
The banking system still needs to be well-capitalized
and they [banks] still have impaired assets and that has an
impact on the economy, Liikanen said.
Nevertheless, he said the markets have bottomed out and
cited the resumption of inter-bank borrowing and
corporate lending, which are strong signals that the
banking system has past the worst of the crisis.
Economists predict that the interest rates in the eurozone
will not rise until the middle of next year at the earliest.
Liikanen suggested that the pace of monetary tightening might
be slow due to as firms readjust and repair balance sheets.
Whenever some capacity will not be fully used and it
takes more time to reinvest in new areas, he said.
The World Bank estimates that excess capacity in the global
economy will be as high as 6.5% below its potential upper level
next year and it will take a further five years for it to
improve to 2% below its potential upper level.
Justin Lin, chief economist at the World Bank said in
Istanbul this weekend that with this kind of
underutilization of capacity, we expect that unemployment will
continue to rise for some time ... and private sector
investment will be depressed.
Lin added: This means the [global] recovery will be
very weak and the foundation for the recovery is
Liikanen also said structural growth prospects in the
eurozone look bleak compared with a global bull run, due to the
regions demographic pressures.