Trichet signals pause in ECB Rate Cuts
(Adds more Trichet comments on lower limits to interest rates)
By Christopher Emsden
DOW JONES NEWSWIRES
The European Central Bank cut its main interest rate to an all-time low
Thursday, but President Jean-Claude Trichet warned against assuming that it
will continue to ease its monetary policy.
The ECB's Governing Council Thursday cut its overnight borrowing interest rate
to 2.0% from 2.5%.
But the ECB's next "important meeting" won't take place until March, Trichet
said in an effort to emphasize that the ECB does not plan to follow other
central banks in taking rates to near zero.
"It's not the intention of the Governing Council to find itself in a liquidity
trap," Trichet said.
That clear statement, along with the unanimous support for the latest rate cut,
helped buoy the euro, which shed earlier modest losses to rise 0.5% to $1.32,
according to EBS.
Trichet acknowledged that euro-zone economic news has been far bleaker than the
ECB expected, and added that policy makers now have darker expectations for the
rest of the year than those outlined in the December staff projections.
Industrial production has plummeted and unemployment begun to rise as the euro
area enters what many economists expect to be the worst recession in decades.
Still, Trichet warned of sharp fluctuations to come in euro-zone inflation,
saying it might pick up again later in 2009 and that the ECB currently believes
its monetary policy is "in line with price stability," the bank's statutory
objective.
The ECB will "monitor very closely" price developments in the 16-member euro
area, he added.
Inflation in the euro area declined to an annual rate of 1.6% in December,
sharply down from 4.0% in July and well below the ECB's target of close to but
below 2.0%, according to a report from Eurostat earlier Thursday.
The ECB has slashed its main rate by more than half from 4.25% in October, a
pace of monetary easing unprecedented even by Germany's Bundesbank, noted ING
economist Carsten Brzeski."The ECB is apparently willing to do everything
necessary to get ahead of the curve," he said.
The rate cut, in line with expectations, was a "no-brainer," said Calyon
strategist Stuart Bennett.
Interest rates are now at a "very, very low level," Trichet said. But he said
the ECB had not made a categorical decision not to take them lower. "I did not
say that two percent is a floor," he said.
The U.S. Federal Reserve has cut its main rate to practically zero.
Trichet said the ECB had been bold in other measures - such as doubling its
balance sheet to support liquidity in the financial markets - and that all
central banks had to consider ways eventually to unwind their emergency
measures.
"I trust all central banks are thinking of an exit strategy," he said. But it's
not time to implement any such stategies, he added.
Trichet listed many risks to economic growth, including slowing money-supply
growth, tighter financing conditions for households and firms and the
likelihood of "very sluggish domestic demand."
But he also emphasized that previous ECB policy action, including rate cuts and
liquidity-boosting measures, appear to be having a positive effect.
Trichet noted that short-term money market rates have declined, adding that he
was "quite impressed" by the visible drop in the three-month Euribor rate -
widely used as a benchmark for mortgage and other lending in the euro area -
after the last ECB rate cut.
-By Christopher Emsden, Dow Jones Newswires; +39-02-58-21-99-00
(END) Dow Jones Newswires
January 15, 2009 09:42 ET (14:42 GMT)
