ECB slashes rate to 2%, more cuts likely

ECB slashes rate to 2%, more cuts likely
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First Published: Thu, Jan 15 2009. 10 26 PM IST
Updated: Thu, Jan 15 2009. 10 26 PM IST
Frankfurt: The European Central Bank, or ECB, cut its benchmark interest rate by 50 basis points to 2% on Thursday, matching its lowest ever rate, and its president said inflation risks continued to diminish as the economy weakened.
Jean-Claude Trichet said economic data and surveys since ECB’s last meeting pointed to a “further weakening of economic activity around the turn of the year, indicating the materialization of previously identified downside risks to activity”.
But he appeared to flag a further rate cut was likely in March rather than February, telling a news conference the “next important rendezvous” would be in March as the central bank would have fresh economic forecasts then.
The next meeting was only three weeks away, he said.
Thursday’s cut, in line with consensus forecasts, marks the fourth in just over three months. The majority of economists in a Reuters poll had expected the ECB to take another 50 basis points from borrowing costs, although the level of uncertainty was unusually high.
Economists said a February move could not be ruled out if economic data soured further.
“Trichet did say that the next meeting is only in three weeks’ time. But we know how quickly the economic situation is moving,” said Steve Barrow, head of G-10 currency research at Standard Bank in London.
“But that’s what he’s saying, so we’ll have to see whether the economic data in the meantime makes that position untenable.”
Euro zone inflation fell to 1.6% in December, compared with ECB’s goal of keeping inflation below but close to 2%, and the bloc was confirmed as in recession late last year.
While rates at 2% match the lowest level in the 10-year history of ECB, they pale alongside almost-zero borrowing costs in the US and Japan, as well as a UK central bank thought to be headed in a similar direction.
The euro turned higher against the US dollar after Trichet’s comments.
Trichet said euro zone inflation risks were continuing to diminish, although they could pick up after mid-year, and demand would be dampened for a protracted period of time.
“We consider risks to price stability over the medium term to be broadly balanced,” he said. “This takes into account the latest economic data releases and survey information which add clear further evidence to the assessment that the euro area is experiencing a significant slowdown.”
Economists expect inflation to fall further and some of them have warned of a danger of deflation, if falling prices make already cautious consumers even more jittery and cut spending.
Recent data showed Germany’s economy, the euro zone’s biggest, likely shrank 1.5-2% in the fourth quarter of 2008 and officials there have signalled this year will see the worst contraction since World War II.
ECB also set new rates for its overnight facilities, after announcing in December it would increase the gap between these rates and the benchmark rate to back to 100 basis points.
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First Published: Thu, Jan 15 2009. 10 26 PM IST