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Lagarde Says ECB Has Room to Cut Rates as Recession Takes Hold

International Monetary Fund Managing Director Christine Lagarde said the European Central Bank has room to cut interest rates as the euro-area economy remains mired in recession.

“Monetary policy should remain accommodative,” Lagarde said in a speech in Dublin today. “We believe that there is still some limited room for the ECB to cut rates further.”

Lagarde said she expects the region’s economy to remain in recession this year. The ECB forecast yesterday that the 17-nation economy will contract 0.5 percent in 2013 instead of the 0.3 percent projected three months ago. Still, ECB President Mario Draghi damped expectations of a rate cut, saying he still anticipates a recovery in the second half of the year.

While a rate cut was discussed, the “prevailing consensus” was to keep the benchmark at 0.75 percent, he said, already a record low.

Draghi stood firm on the rules of the ECB’s yet-to-be-used bond-buying program, known as Outright Monetary Transactions.

The plan, Draghi said, remains an “effective backstop” to further financial-market turmoil as long as governments sign up to a European-sanctioned program of economic reforms. It’s not there, he added, to help countries like Ireland return to borrowing on the open market.

“Outright monetary transactions can help monetary policy work better and sustain fiscal adjustment efforts by reducing financing costs in countries facing severe market constraints,” Lagarde said.

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