ECB official: There is limited margin for further rate reductions

FRANKFURT—A top European Central Bank official said there is limited room for further interest-rate reductions, suggesting the central bank is unlikely to take aggressive new measures to jump-start the euro bloc’s battered economy.

Rather, the central bank will continue to focus on reducing the sharp divide in financial conditions across the 17-member euro zone while governments press ahead with fiscal and economic reforms, ECB executive board member Peter Praet said in an interview with The Wall Street Journal.

“There is little margin of maneuver,” Mr. Praet said. “I believe we should continue to focus on ensuring the effectiveness of monetary policy.”

Mr. Praet heads the central bank’s economics division, giving him a strong voice over the bank’s interest-rate deliberations. The ECB’s chief economist starts each monthly board meeting with an overview of the economic outlook.

Last week, the ECB held its main policy rate unchanged at 0.75% despite slashing its economic forecast for next year to a 0.3% contraction from 0.5% growth as forecast in September. The euro zone has failed to post any economic growth since the third quarter of last year, and is expected by private-sector analysts to shrink 1.5% to 2%, at an annualized rate, this quarter. ECB staff expect inflation, currently 2.2%, to slide to 1.4% my 2014, well below the bank’s target of just under 2%.

Many analysts thought the gloomy forecasts justified an immediate rate cut at last week’s meeting. The ECB discussed lowering rates last week, but ultimately decided after a “wide discussion” to keep them unchanged by “prevailing consensus,” ECB President Mario Draghi said last week, suggesting some policymakers favored a cut.