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European Central Bank council member Christian Noyer suggested there may be scope to lower interest rates in Europe if policy makers contain inflation expectations.

“A solid anchoring of inflation expectations remains a pre-requisite for rate cuts in times of heightened financial uncertainty and downside risks to growth,'' Noyer, who is also governor of the Bank of France, said in a speech in Prague today. While the ECB must remain “especially cautious'' in assessing price expectations, there are reasons to believe the outlook has not deteriorated markedly, Noyer said.

“It's an interesting choice of words,'' said James Nixon, an economist at Societe Generale SA who previously worked as a forecaster at the ECB. “It does seem to hint that he sees some potential for rate cuts down the road in the face of financial- market turbulence and downside risks to growth.''

Noyer's comments mark the first time this year that an ECB council member has mentioned the possibility of the central bank reducing interest rates. At the same time, he said the economic outlook in Europe is “much more encouraging'' than in the U.S., where the Federal Reserve has slashed borrowing costs six times since September to fend off a recession.

While the Fed has lowered its key rate by 300 basis points to 2.25 percent since the U.S. housing slump caused credit markets to seize up in August, the ECB has left its benchmark interest rate at a six-year high of 4 percent to fight inflation.

Not Right Now

Noyer said the policy considerations behind the Fed's actions are not relevant in Europe “for the time being,'' as major financial disruption from the credit squeeze is “less likely'' and household debt remains “relatively low.''

“Even if our economies are slowing down, no recession lies on the horizon,'' he said creditreports. Still, “the crisis is clearly not over and all the consequences of accumulated financial imbalances have not unraveled yet.''

Deutsche Bank AG, Germany's biggest bank, announced today it will write down a record 2.5 billion euros ($3.9 billion) in loans and asset-backed securities for the first quarter and said markets have deteriorated.

UBS AG, struggling to stem damage from the U.S. subprime meltdown, today reported a second straight quarterly loss after an additional $19 billion of writedowns.

The ECB has stressed its main concern remains keeping control of inflation, which accelerated to 3.5 percent last month, the fastest pace in almost 16 years. The Frankfurt-based central bank aims to keep annual gains in consumer prices just below 2 percent.

ECB Script

Departing from ECB script, Noyer voiced some optimism about the inflation outlook. The recent rise in inflation expectations, as measured by French inflation-indexed bonds, may be partly due to “technical factors and not reflect any marked deterioration in the outlook for inflation,'' he said.

Investors have nevertheless reduced bets on ECB rate cuts this year, futures trading shows. The implied rate on the Euribor futures contract maturing in December was at 4.07 percent today, up from 3.31 percent on Feb. 11.

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