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European Central Bank council member Michael Bonello said the economic impact of the credit crunch is difficult to predict and policymakers will take a "prudent approach" when weighing the need for lower interest rates.

We will be assessing the information as it comes in and take a decision at the next meeting after due deliberation," Bonello, who heads Malta's central bank, said. "Particularly in these uncertain times, that is the most prudent approach to take."

Investors raised bets on the ECB cutting rates as soon as next month after president Jean-Claude Trichet on Thursday said inflation pressures are diminishing as economic growth slows.

The financial crisis is intensifying in Europe, with governments forced to bail out banks and guarantee consumers' deposits after credit costs soared to records.

Major efforts are being made to mitigate the impact of the financial turmoil on the real economy, but you have various elements at play in different countries and what the overall impact is going to be at the end of the day is unpredictable," Bonello said. "There are several indications that the tempo of activity is slowing down but we have to wait for the [domestic product] number for the third quarter to know exactly the extent of this weakening."

The economy of the 15 countries sharing the euro contracted 0.2 per cent in the second and third-quarter GDP figures are due on November 14. The ECB will publish new growth and inflation forecasts in December.

The central bank last week left its benchmark interest rate at 4.25 per cent, a seven year high. Investors have priced in a reduction to 4 per cent by December.

The world's biggest financial institutions have recorded almost US$600 billion (Bt20.64 billion) in write downs and losses tied to the United States mortgage market since the start of last year, driving Lehman brothers Holdings into bankruptcy on September 15 and forcing governments to rescue banks in the US, UK and Europe. Bonello, who declined to comment on specific bail-outs, said the measures are "designed to restore confidence".

The ECB has held off cutting rates because of its concern that the jump in inflation will become entrenched through a wage-price spiral as workers seek compensation for the higher cost of living.

While inflation in Europe last month slowed to 3.6 per cent after crude-oil prices retreated from a July record of $147.27 a barrel, it is still above the ECB's 2-per-cent limit. Trichet last week said inflation risks have "not disappeared".

Bonello said, "The Governing Council has repeatedly warned that second- round effects risk setting off a wage-price spiral.

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Record number of banks park cash as ending woes plague market

The European Central Bank said a record number of banks took up an offer to park cash with it on Monday as financial institutions baulk at lending to each other.

The ECB said it drained €172 billion (Bt8.05 trillion) from the banking system at a fixed rate of 4.25 per cent for one day.

A record 111 banks participated in the unscheduled liquidity-absorbing operation, more than twice the 54 involved in the tender on Friday, after the ECB last week relaxed restrictions on which institutions can take part.

Commercial banks are refusing to lend to each other after the United States housing slump caused the collapse of New York-based Lehman Brothers Holdings and forced governments to bail out banks in the US and Europe.

Last week, banks borrowed the most in more than seven years from the ECB at its emergency rate as the credit crunch worsened across the region.

Yesterday's draining operation was the fourth since banks' overnight deposits with the ECB jumped to a record €102.8 billion on September
30.

From yesterday, all banks that are eligible to participate in standard market operations and fulfil additional criteria specified by national central banks are allowed to bid in these auctions.

The ECB yesterday lent banks US$50 billion (Btl.72 trillion) for one day as demand for dollars in Europe surges. Banks bid for $90.9 billion.

The ECB will provide sufficient liquidity to keep money markets working and will continue to provide cash in euros as well as in dollars,
ECB president Jean-Claude Trichet said.

Confidence in financial markets is "the most important ingredient" to ending the turmoil, he said.
The worst US housing slump since the Great Depression has pushed up the cost of credit globally. The world's biggest financial companies have posted almost $600 billion in write-downs and credit losses since the start of last year after the sub-prime mortgage market collapsed.

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