Credit crunch will continue to bite, warns ECB governor

3 April 2008

Investors should continue to be cautious in the current financial climate despite seeing banking shares rebound sharply, according to European Central Bank (ECB) governor Axel Warner.

Banking stocks bounced back on Tuesday despite UBS announcing additional writedowns of $19 billion, which was followed by Deutsche Bank declaring losses of $3.9 billion. However, Mr Weber warned that hopes the sector had overcome the worst of the sub-prime crisis may be premature.

"The crisis of confidence is not over yet. As long as the price decline in the US property market continues, further turbulences have to be expected," Mr Weber cautioned in an interview with the German newspaper Bild.

He added that greater transparency was needed before the sector could be given the all-clear, stating that banks "have to disclose their losses" before confidence could be restored.

Weber also emphasised that high Euro zone inflation, which provisionally increased to 3.5 per cent in March, was a "cause for concern" and would have to be reduced to around 2 per cent in the long-term.

This in turn has dampened expectations that the ECB will follow the US Federal Reserve in cutting rates to ease pressure on the beleaguered financial sector.

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