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BEIJING–China unveiled a $586 billion (U.S.) stimulus package yesterday in its biggest move to inoculate the world’s fourth-largest economy against the global financial crisis.

The cabinet approved a plan to invest the money in infrastructure and social welfare by the end of 2010, a statement on the government’s website said.

Some of the money will come from the private sector. The statement did not say how much of the spending is on new projects and how much is for ventures already in the pipeline that will be speeded up.

China’s export-driven economy is starting to feel the pinch of weakening United States and European economies, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion.

Economic growth slowed to 9 per cent in the third quarter, the lowest level in five years and a sharp decline from last year’s 11.9 per cent.

That is considered dangerously slow for a government that needs to create jobs for millions of new workers who enter the economy every year and to satisfy a public that has come to expect steadily rising incomes.

Exports have been growing at an annual rate of more than 20 per cent but analysts expect that may fall as low as zero in coming months as global demand weakens.

The International Monetary Fund has urged governments to adopt economic stimulus packages and, in some cases, to cut interest rates further, to counteract the slowdown.

China joins other major economies such as the U.S., Japan and Germany which have already introduced their own stimulus plans.

The U.S. allocated $168 billion earlier this year for tax rebates to individuals and tax breaks for businesses. Germany set aside $29 billion for tax breaks on new cars and credit assistance for companies. Japan allotted $275 billion for loans to small- and mid-sized businesses and discounts on highway tolls among other measures.

China’s statement said the cabinet, at a meeting chaired by Prime Minister Wen Jiabao, had "decided to adopt active fiscal policy and moderately easy monetary policies Faxless pay advance."

The statement said the spending would focus on 10 areas. They included picking up the pace of spending on low-cost housing as well as increased spending on rural infrastructure.

Money will also be poured into railways, roads and airports. Spending on health and education will rise, as will environmental protection and technology spending.

Efforts to rebuild disaster areas, such as Sichuan province where 70,000 people were killed and millions left homeless by a massive earthquake in May, will also be accelerated. That includes $2.93 billion planned for next year that will be moved up to the fourth quarter of this year.

The statement said rural and urban incomes would be increased.

Credit limits for commercial banks will also be removed to channel more lending to priority projects and rural development, it said.

Reform of the value-added tax will cut taxes by $17.5 billion for enterprises, the statement said.

The stimulus plan should give a lift to China’s shares, said Ben Simpfendorfer, an economist at Royal Bank of Scotland PLC in Hong Kong. The CSI 300 Index has tumbled 69 per cent this year, the biggest drop among stock benchmarks in the Asia-Pacific region.

"We view this as a positive step," the U.S. Treasury’s Undersecretary for International Affairs David McCormick said. "This stimulus should help encourage domestic consumption" in China, he said.

"The golden years have shuddered to a dramatic halt," said Stephen Green, head of China research at Standard Chartered Bank PLC in Shanghai.

- With files from the Star’s wire services

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Iceland's government is “very close'' to a rescue deal with the International Monetary Fund that may also include financial help from Nordic neighbors and Japan, Industry Minister Oessur Skarphedinsson said.

The fund is preparing a plan to present to the government, which is also seeking a loan from Russia, Skarphedinsson said in a telephone interview from Reykjavik yesterday. The Financial Times and New York Times reported that the rescue will amount to $6 billion.

Iceland needs aid from the IMF and Nordic countries after the collapse of its banking system froze its foreign-exchange market, making it hard for importers to finance purchases. Glitnir Bank hf, Landsbanki Islands hf and Kaupthing Bank hf imploded with debts of $61 billion, or as much as 12 times the size of the economy.

“It's clear from our diplomatic contacts that if and when an agreement is made between the IMF and Iceland, then our neighbors would be quite willing to sail in their wake,'' Skarphedinsson said. “We in fact have confirmation of what I would label quite generous lending facilities.''

Norway, Sweden and Denmark would probably follow any accord with the IMF, with Japan also a candidate to provide the Atlantic island with aid, he said.

“We are part of the Nordic family,'' Skarphedinsson said. “It's really stating the obvious to say that definitely the Nordic countries would be among those that would seek to assist us through this crisis, when and if we go to the IMF.''

Nordic Family

The central banks of Denmark, Norway and Sweden in May provided Iceland with a euro swap facility worth a total of 1.5 billion euros ($2 billion). The central bank of Iceland has so far drawn on 400 million euros of that.

Skarphedinsson declined to comment on the Financial Times report that said $1 billion will come from the IMF and the remainder from Nordic governments and Japan. The New York Times said Russia will make a contribution.

The chief press officer at Sweden's central bank, Britta von Schoultz, declined to comment. Norges Bank head of communications said she wasn't “aware of'' any agreement with Iceland linked to a possible IMF deal. Calls made to Danish central bank spokeswoman Louise Buchter weren't immediately returned.

`Good Neighbor'

Swedish Finance Minister Anders Borg said his government was in discussions with Iceland.

“We will try to be a good neighbor,'' he told reporters in Berlin yesterday. “But eventually this is up to Iceland because they have to get into an IMF program, and that is an essential part of them re-establishing themselves.''

Japanese Finance Minister Shoichi Nakagawa said at a news conference today that he hadn't heard whether the IMF or Iceland asked his government for aid no fax payday advances. Nakagawa told his Group of Seven counterparts in Washington this month that Japan is ready to contribute to the IMF's emergency lending program.

“Japan wants to show its initiative in the global response to growing financial risks,'' said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo.

Iceland's opposition leader Steingrimur Sigfusson criticized the government's handling of the crisis, calling for better economic management.

“We know what to do if we have an earthquake or a natural catastrophe, we put up a control center, much the same as a country does if it has a war on its hands,'' Sigfusson said. “But the government hasn't done this so the management has been too weak.''

3 Cents

Bonds of Iceland's three biggest banks are on sale for as little as 3 cents on the dollar after the government began a restructuring that may leave debt investors with nothing, according to broker KNG Securities LLP.

The three lenders have together amassed debt equivalent to about 12 times the size of the economy, according to Bloomberg data. The government has yet to provide a clear plan on how that debt will be repaid since taking control of the banks. Glitnir and Kaupthing have already missed making bond payments.

The failure of banks on the island, with a population of only 320,000, is affecting investors and depositors across the globe. Kaupthing is poised to become the first European bank to default in Japan's samurai bond market after investors said the Icelandic lender missed a coupon payment. Kaupthing now has a seven-day grace period to honor the obligations.

“The samurai bond default is raising concerns among Japanese banks about whether more will arise and where they might arise,'' said Dai-Ichi Life's Kumano. That said, he added, “I'm not sure how much this funding to Iceland would reduce the chances of more defaults.''

Shrinking Economy

Iceland's economy may contract as much as 10 percent, according to Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen. The central bank on Oct. 15 cut the benchmark interest rate by an unprecedented 3.5 percentage points to 12 percent, indicating policy makers have given up trying to control inflation. Prices may surge as much as 75 percent in coming months, Christensen estimates.

A nation that was ranked the fifth-richest in the world per capita in the United Nations 2007/2008 Human Development Index is now facing shortages of imports including food and clothing. The central bank on Oct. 10 called on commercial lenders to prioritize foreign-currency transactions to cover payment for essential imports such as food, fuel and medicine.

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OTTAWA–Canada is safe from recession, even if the U.S. Congress rejects a bailout package and global credit dries up further, but the economy may take enough of a beating to force the Bank of Canada to cut interest rates.

Credit is harder to come by for Canadian businesses, curtailing their investments. U.S. consumer purchases of made-in-Canada goods is wilting and commodity prices are slamming into reverse from record highs.

That toxic mix has sent economists back to their models to churn out lower growth forecasts for both 2008 and 2009, raising the likelihood that the central bank will have to consider easing borrowing conditions.

"If the U.S. government can’t put something through, that clearly increases the risk to Canada through the end of the year and into next year," said Ryan Brecht, economist at Action Economics.

The export sector, heavy reliant on the U.S. market, is getting clobbered and 70,000 factory jobs have been lost in the past year. But commodity prices are still higher than a year ago, padding household and corporate income.

"At this point we don’t really see negative growth for Canada, even in the worst-case scenario. We still look at them as being able to eke out a little bit of growth because they’ve been so resilient thus far," he said.

Last month after holding rates steady at 3 per cent, the Bank of Canada flagged a worsening U.S. outlook as one key risk that could prompt it to change its mind on rates. In a Sept. 25 speech Governor Mark Carney said this risk had become "more probable."

Markets on Thursday had priced in a 96 per cent probability of a rate cut on Oct. 21 due to the financial market meltdown, up from 51 per cent on Sept. 23.

Some economists are gradually coming around to that view as well.

"Even if the rescue package is passed, I’m still assuming that there is about a 60 percent chance the bank will cut in October," said Dale Orr, chief economist on Canada at Global Insight.

Prime Minister Stephen Harper and Finance Minister Jim Flaherty have used words like "resilience" and "island of stability" to describe Canada’s economy and banking system since the financial crisis escalated, triggered by the collapse of U.S online payday advance. investment banks and other financial pillars.

Both men are vying for votes in an Oct. 14 election on a platform of prudent economic stewardship. So Canadians could be forgiven for wondering if their word is too good to be true.

"We are not upbeat on the real economy. … We’ve had to pull our forecast down with each successive round (of the crisis). I think growth of under 1 percent this year is now the most likely outcome," said Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada.

Flaherty this week predicted economic growth of 1 per cent this year, almost double what some economists now expect. Dale Orr, for example, revised down his growth outlook to about 0.6 per cent this year and 1.4 per cent next year.

Still, politicians and economists alike agree that the Canadian banking system is sturdier than in the United States or Europe because of conservative regulations. "We are probably as insulated as anybody in the world, given what’s happening next door," Hodgson said.

As the U.S. House of Representatives prepares to vote on Friday on a proposed $700 billion rescue package for financial institutions and European leaders scramble to cobble together a plan of their own, such a move is still unfathomable in Canada.

"I would be astonished if we needed the kind of credit backup that the Treasury and Fed are putting together in the United States," said Hodgson.

But the liquidity problems in Canada have been serious enough to prod the central bank to offer to inject $10 billion into money markets by the end of October.

If all else fails to calm global markets, Carney is seen as fully committed to joining in any coordinated action by the world’s major central banks.

"You hate to think about it but to be realistic, if those politicians don’t get their act together and they disappoint everybody, something has got to move in very quickly to instill confidence and I would guess this is certainly one way of doing it," said Orr.

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European inflation slowed for a second month in September, easing to the lowest rate since April as oil prices extended declines from a record.

The inflation rate in the euro area fell to 3.6 percent from 3.8 percent in August, the European Union statistics office in Luxembourg said today. That matched the median estimate of 39 economists in a Bloomberg News survey.

Oil prices have dropped by more than one-third from their all-time high in the last three months, cutting the cost of gasoline and heating oil. At the same time, stagnating economic growth is reducing the capacity of companies to increase prices. The European Central Bank will probably keep its key interest rate at 4.25 percent on Oct. 2 as it remains “uneasy about inflation,'' according to governing council member Axel Weber.

“The fall in consumer-price inflation shows that price pressures in the region are finally receding,'' said Jennifer McKeown, an economist at Capital Economics in London. “But the ECB has been concerned that core inflation might pick up sharply if wage growth reacts to the still high level of inflation and the previous strength of the labor market.''

Crude oil extended declines today after falling the most in almost seven years yesterday as U.S. lawmakers rejected a $700 billion financial rescue plan. Crude was at $98.34 a barrel at 12:15 p.m. in London, compared with it July 11 record of $147.27.

Wheat, Cotton

In addition to oil, commodities including wheat, cotton and corn have fallen in recent months, dragging the Reuters/Jefferies CRB Index of 19 commodities around 28 percent from its record in July.

The euro fell for a second day against the dollar today, dropping 0.6 percent to $1.4345 as France and Belgium led a state-backed rescue of Dexia SA, the world's biggest lender to local governments.

Companies and consumers have scaled back their predictions for price growth in the euro area as oil prices have declined. A gauge of company selling-price expectations fell to 12 in September from 17 in August, reaching the lowest in 10 months, according to a monthly European Commission survey cash advance. Consumers' outlook for prices dropped to 17 from 22.

A decline in headline inflation next year “is likely to be partly offset by rising core inflation, but this should no longer be an issue from 2010,'' said Nick Kounis, an economist at Fortis Bank in Amsterdam. “Indeed, downside risks to the growth outlook and the implications of weaker growth for the medium-term inflation outlook is likely to increasingly be the focus of the ECB's attention in the coming months.''

`Magic Away'

The ECB aims to keep inflation close to but below 2 percent. In Germany, Europe's largest economy, inflation slowed less than economists forecast this month, according to national data published Sept. 26. Prices rose 3 percent from a year earlier, compared with economists' forecasts for 2.9 percent.

While the ECB is “aware'' that the economy is in a “phase of weakening,'' the economic slowdown “won't magic away the inflation problem,'' Weber said on Sept. 23.

Still, as consumer-price growth eases and growth cools, economists at banks including Societe Generale and BNP have revised their predictions for ECB interest rates.

James Nixon, an economist at Societe Generale in London, on Sept. 26 forecast three quarter-percentage-point cuts in 2009, revising a previous forecast for rates to remain unchanged throughout next year.

Wattret at BNP also forecast three rate cuts next year in a note this month, having earlier predicted no change. Both see the benchmark rate being lowered to 3.5 percent in 2009.

The figures published today are an estimate. The statistics office will publish a detailed breakdown of the data and the core rate on Oct. 15.

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Global markets plummeted on Monday after investment bank Lehman Brothers filed for bankruptcy protection, rival Merrill Lynch agreed to be taken over and the Federal Reserve threw a life line to the battered financial industry.

As a deepening crisis took new, bigger victims, the U.S. Federal Reserve said for the first time it would accept stocks in exchange for cash loans and 10 of the world’s top banks agreed to establish a $70 billion emergency fund, with any one of them able to tap up to a third of that.

On a black Sunday for Wall Street, frantic attempts to find a rescuer for Lehman failed, and troubled insurer American International Group asked the Fed for a lifeline, according to news reports.

The events signal a seismic shift in Wall Street’s power structure with big name investment banks biting the dust and major banks like Bank of America and JPMorgan Chase becoming the survivors.

“It’s a return to pure capitalism, the survival of the fittest — the government can’t and won’t bail everybody out,” said Justin Urquhart Stewart, investment director at 7 Investment Management in London.

“Investors will now retreat to the trustworthy banks, though that’s not a phrase that trips off the tongue easily nowadays.”

Bank of America agreed to buy Merrill Lynch in an all-stock deal worth $50 billion, seeking a bargain as the world’s largest retail brokerage sought refuge from fears it could be the next victim.

“It’s just shockingly fast how it happened,” an employee for Merrill in Asia said faxless payday loan. “It’s hard to believe there will be no more Merrill Lynch,” he said of his firm, known as The Thundering Herd. 

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Kerry Killinger is out as CEO of Washington Mutual, the nation’s largest thrift, according to the Wall Street Journal.

Killinger will be succeeded by Alan Fishman, who is chairman of Meridian Capital Group, a New York-based commercial mortgage broker, according to the paper. Prior to that, Fishman served as president and chief operating officer of Sovereign Bank (SOV, Fortune 500), which is the nation’s second-largest thrift and based in Philadelphia.

Wamu’s shares have lost 85% of their value in the last year, and Killinger has said that the company could sustain losses of between $12 billion and $19 billion, according to the Journal. The thrift does a lot of business in states that have seen housing prices fall sharply, and holds over $50 billion in risky option adjustable-rate mortgages.

In April, the private equity firm TPG (formerly Texas Pacific Group), led a $7 billion capital infusion into Wamu (WM, Fortune 500), according to the paper, and some analysts believe the thrift will need more than that faxless payday advance.

Throughout the turmoil, the company’s board backed Killinger, who has been at the helm since 1990. But in June he was stripped of his title as chairman.

Fishman will receive a $10 million signing bonus including $2.5 million in performance based stock awards, according to the Journal, as well as a salary of $1 million and options to buy five million shares.

Killinger will retire with no extra severance benefits, the paper reported. He currently has $5.2 million in common stock, $14.9 million in deferred compensation and $3.5 million in pension benefits. 

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The National Cancer Institute awarded a team led by Dr. Gerold Bepler, program leader for thoracic oncology at the H. Lee Moffitt Cancer Center & Research Institute, a Specialized Programs of Research Excellence grant in lung cancer.

The SPORE grant totals $10.5 million over five years, a release from Moffitt said.

It’s Moffitt’s first SPORE grant, which are designed to quickly bring potentially successful treatments from the laboratory to hospitals. Moffitt applied for the grant last year.

The grant will allow Moffitt to continue and enhance its efforts to contribute to the prevention and cure of lung cancer, Bepler said in the release cash advance loan. Lung cancer is a leading cause of cancer death for men and women, and Florida is second behind California in the number of new lung cancer cases each year, the release said.

The H. Lee Moffitt Cancer Center & Research Institute, located in Tampa, is the only Florida-based cancer center designated by the National Cancer Institute as a comprehensive cancer center.

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Federal Reserve Bank of Kansas City President Thomas Hoenig said for economies to work best, institutions must be allowed to `fail.'

Economies must “find a balance between financial stability and a stable price environment and in doing so must be able to allow individual institutions to fail,'' Hoenig said in a speech today in Buenos Aires.

Turmoil in financial markets has persisted, even after the Fed started and expanded emergency programs to lend to commercial and investment banks. Changes in financial markets combined with the subprime-mortgage crisis have “raised anew questions about the role of central banks in maintaining financial stability,'' he said.

The subprime-mortgage collapse has taken a toll on banks and other financial companies, which have reported $514 billion of writedowns since the start of 2007. The Fed rescued Bear Stearns Cos. from bankruptcy in March, facilitating the firm's merger with JPMorgan Chase & Co. by lending against $29 billion of Bear securities.

“Financial crises will occur despite our best efforts to prevent them,'' Hoenig said in prepared remarks at an event hosted by Argentina's central bank. “The `Too Big to Fail' issue will only grow in importance as the consolidation of the financial industry grows in both size and scope in future decades.''

Hoenig didn't comment on the U.S. economic outlook or monetary policy in his remarks.

Job Losses

About 463,000 Americans have lost jobs since January as the worst housing recession in a quarter century has curtailed spending and bank lending free credit report.com. Economists expect annualized rates of growth of 1 percent in the third quarter and 0.4 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey in early August.

Earlier today, Federal Reserve Governor Randall Kroszner said the U.S. housing slump and financial turmoil have rippled to global emerging markets, slowing growth and bringing stock market declines.

The Fed said Aug. 11 in a quarterly survey that more banks tightened lending for homes, small businesses and credit cards. About 75 percent of U.S. banks indicated they raised standards on prime mortgage loans, up from 60 percent in the previous survey, the central bank said.

Federal Reserve Chairman Ben S. Bernanke said on Aug. 22 that financial turmoil has “not yet subsided,'' and is contributing to weaker economic growth and higher unemployment. Policy makers will “continue to review'' the Fed's measures to ensure liquidity to determine “if they are having their intended effects,'' Bernanke said.

Hoenig, 61, dissented from a rate cut on Oct. 31 because of inflation concerns. Hoenig doesn't vote this year and will vote next in 2010. Dallas Fed President Richard Fisher has dissented from Federal Open Market Committee votes five times this year, preferring to raise interest rates last month.

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Russia could cut poultry and pork import quotas by hundreds of thousands of tons, the country’s agriculture minister said Wednesday. The move could hit American producers hard and comes amid heightened tensions between Moscow and Washington over the war in ex-Soviet Georgia.

"It is time to change the quota regime and reduce imports, which have unfortunately built up in recent years," Alexei Gordeyev told reporters, according to the ITAR-Tass news agency.

He said domestic producers could make up the shortfall if imports were reduced.

Any substantial cuts would likely have a significant impact on U.S. poultry producers, for whom Russia is the biggest market. Russians sometimes refer to U.S. poultry imports as "Bush’s legs," a reference to the frozen chicken shipped to Russia amid economic troubles following the 1991 Soviet collapse, when the current U.S. president’s father was in office.

Earlier this week, Prime Minister Vladimir Putin backed proposals to freeze some of the agreements - particularly in agriculture - relating to its efforts to join the 153-member World Trade Organization. Officials claim Moscow agreed to certain conditions with member countries in return for their help in fast-tracking Russia’s entry.

"Agreements signed more than three years ago as part of the negotiations on WTO accession are unfortunately no longer in Russia’s interests," said Gordeyev. "To put it mildly, we’ve been deceived."

Last month, Russian and U.S. lobbyists agreed in principle to cutting poultry imports to Russia starting in 2009.

U.S. producers supply nearly 75% of the total poultry import quota set by Russia, which stands at 1.2 million tons.

An analyst said Russia’s timing was no coincidence.

"It has been on the agenda for some time," said Chris Weafer, chief strategist at UralSib bank in Moscow. "But the fact that it has been mentioned now is almost certainly linked with the rhetoric that we’ve had from Georgia, and from Prime Minister Vladimir Putin. …It has just been accelerated as a result of current events."

Russian forces drove deep into U.S. ally Georgia earlier this month. Moscow has kept troops in the Caucaus nations despite Western protests and on Tuesday ignored President Bush’s exhortation against recognizing the independence of two Georgian separatist regions.

American meat producers are increasingly looking to international markets as a way to offset domestic sluggishness, so any cuts could hurt them pay day loan. They’re grappling with high production costs and an oversupply of meat on the U.S. market, which is keeping prices down.

Analysts say that American meat producers have to grow overseas - where a weak U.S. dollar has made their products more attractive - to stay profitable. For many, Russia is key.

Russian cuts could greatly affect Tyson Foods Inc (TSN, Fortune 500)., the world’s largest meat company. Russia represented 17% of the $1.4 billion worth of chicken sales made internationally last year by the Springdale, Ark.-based company. Russia ranked second only behind Mexico in Tyson’s top international markets for its poultry.

Tyson did not immediately return a call for comment.

Jim Sumner, president of the USA Poultry & Egg Export Council said that a decline in Russian imports of U.S. poultry has been expected for a while, since Russian’s own poultry production has increased dramatically in recent years, while the country’s consumption has remained stable.

When asked if decreased exports to Russia would hurt U.S. poultry producers, Sumner pointed out that the industry is opening new markets that could fill a potential void, including China and Ukraine.

"I don’t think we’re anticipating it’s going to be at a level that’s going to be a big problem," he said.

Overall, poultry imports account for nearly 40% of Russia’s total consumption, and pork around 30%. The government has pursued a policy to prop up its agriculture industry in recent years, making efforts to attract domestic and foreign investment into a sector which has suffered from massive lack of investment in past decades.

Russian President Dmitry Medvedev told the Group of Eight nations earlier this year that Russia had a key part to play in addressing the global food crisis. He said that in the long term, Russia would significantly increase its agricultural production and supplies to the domestic and foreign markets.

But analysts say it will take Russian producers time to plug the gap left by foreign producers. It could take up to two years for domestic supply to match demand, pushing up prices in the process, said Natalia Zagvozdina, an analyst at Renaissance Capital investment bank. 

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European Central Bank council member Axel Weber said there's no scope for interest-rate cuts and policy makers may need to raise borrowing costs once the economy emerges from its slump.

“Monetary policy at the moment is roughly where it should be and I think the discussion about declining rates in Europe is premature,'' Weber, 51, said in an interview in his office in Frankfurt yesterday. “If the economic outlook brightens somewhat again towards the end of the year and next year, which I still expect, we'll have to see if action is necessary.''

Europe's economy contracted in the second quarter and may not recover in the third, raising the risk of the region's first recession since the euro was introduced in 1999. Weber said the ECB, which increased its benchmark rate by a quarter point to 4.25 percent in July, remains focused on fighting inflation. Bond yields and the euro jumped.

“I don't expect inflation to come down necessarily just with weaker growth,'' Weber said. “Inflation is still the No. 1 worry for central bankers in the euro region.''

“Weber wants to keep the option open to raise rates next year,'' said Holger Schmieding, chief European economist at Bank of America Corp. in London. “He wants to choke any rate-cut debate.''

Rate-Cut Bets

This morning, Eonia forward contracts showed investors had fully priced in a cut in the ECB's benchmark rate to 4 percent by May. The yield on the May contract rose 9 basis points to 4.09 percent after Weber's remarks were published. The euro gained half a cent to $1.4773 and yields on two-year government bonds increased 4 basis points to 4.03 percent.

Weber said while current rates are “roughly adequate'' for “the imminent period of cyclical weakness,'' they are “still more on the accommodative side than being neutral.''

Inflation at 4 percent is running at twice the ECB's definition of price stability of just less than 2 percent.

Inflation will remain in breach of the ECB's price-stability goal next year and “we're not even sure that inflation on average will be below 2 percent in 2010,'' Weber said faxless online payday advances.

“If inflation risks further materialize and if we come to the conclusion that the inflation outlook has deteriorated, we'll have to re-examine our monetary-policy stance,'' he said. “At the moment, this isn't an issue.''

Recession Concern

Business confidence in Germany plunged to a three-year low this month, heightening concern that Europe's largest economy is slipping into a recession.

While oil prices have receded from a record $147.27 a barrel, they're still up 60 percent over the past year, crimping companies' spending power just as the euro's appreciation and the U.S. housing slump weigh on exports.

In June, ECB staff projected growth would slow to about 1.8 percent this year and 1.5 percent in 2009 from 2.7 percent in 2007. The bank will publish new growth and inflation forecasts on Sept. 4, when it announces its next rate decision.

Weber said he expects “a slight downward correction'' of the growth estimates for this year and next. “The European economy, in my opinion, will be robust once we're through this dry spell,'' he said.

Inflation forecasts may be revised “slightly higher'' from the current 3.4 percent and 2.4 percent for this year and next. The ECB is concerned that long-term inflation expectations are above 2 percent, Weber said.

The long-term inflation expectation, defined as through 2013, rose to 2.03 percent in August, according to the ECB's quarterly survey of forecasters published Aug. 14. That's the highest since the survey started in 1999 and up from 1.95 percent three months ago. Expectations measured by the breakeven rate on French five- year inflation-indexed bonds were at 2.19 percent today.

“We observe with concern that the majority of market watchers don't expect us to meet our stability norm at the 6 to 10-year horizon,'' he said. “For a central bank this puts in question its credibility and this can't be tolerated.''

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