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Trichet: Main Interest Rate Could Go Lower

Thursday, 02 Apr 2009 10:04 AM

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FRANKFURT -- The European Central Bank cut interest rates by a smaller-than-expected 25 basis points on Thursday, but left the door open for more cuts and promised to reveal any plans for other ways to boost the recession-bound economy next month.

Thursday's decision took the main refinancing rate to a new record low of 1.25 percent and trimmed the overnight deposit rate, which now sets the floor for money markets, to just 0.25 percent.

But analysts were left feeling short-changed as the vast majority had expected the ECB to lower the main rate by 50 basis points to 1.0 percent.

President Jean-Claude Trichet said the overnight deposit rate was unlikely to go any lower, but hinted that the ECB, which has already reduced rates six times since last October, would take another 25 basis points off the refi rate.

"I would say very candidly as regarding the main policy rate it is not the lowest limit. I do not exclude that we could in a very measured way go down from the present level," he told a news conference.

Trichet failed to announce any extension of the ECB's maximum loan periods, dashing expectations that these would be lengthened to 12 months from the current maximum of 6 months.

Instead, he said the ECB's Governing Council would decide whether to take further "non-standard" steps in its monetary policy at its next policy meeting in May.

"It's an important message that I tell you that the next decision-making rendezvous; we will tell you what has been decided for the non-standard measures."

The small size of the rate cut pushed the euro above $1.34 against the dollar. However, it eased again due to a lack of news about any ECB plans to buy assets such as corporate bonds to boost the money supply.

Major central banks including the U.S. Federal Reserve, Bank of Japan and Bank of England, have begun buying assets under quantitative easing policies to lower longer term interest rates and aiming to boost their economies.

"This was a surprise. It seems like a compromise," said Dresdner Kleinwort economist Rainer Guntermann of the rate decision. "It was a disappointment that the ECB Governing Council did not find a more decisive reaction."

A SURPRISE

Others were already switching their attention to next month.

"The May meeting promises to be a very interesting one," said Aurelio Maccario, Chief Euro Area Economist at Unicredit.

"In our view, the ECB will likely announce another cut in the refi rate ... They will announce the extension of the refinancing operations and probably will provide details on the inception of an asset purchasing programme."

The ECB has now cut its benchmark rate from 4.25 percent since October as the euro zone economy has gone from bad to worse. Economic forecasts have continued to be slashed and policymakers are still feeling in the dark to pinpoint an end to the global financial crisis.

But Trichet stuck with his recent call that things would start to improve next year. "The world economy, including the euro area, is undergoing a severe downturn," he said. "Both global and euro area demand are likely to remain very weak over 2009 before gradually recovering in the course of 2010."

The latest economic data have shown little sign of a let up in the recession, while annual inflation hit a record low of 0.6 percent in March and is expected to fall further.

Euro zone unemployment jumped more than expected in February to 8.5 percent, while the Organisation for Economic Cooperation and Development warned this week it could reach almost 12 percent in 2010.

The OECD also predicted the economy would shrink 4.1 percent this year, far more than the ECB's current worst case scenario of 3.2 percent, and lending data now show banks are reducing the supply of loans to firms and consumers.

Trichet would not comment whether he thought the OECD's forecasts were over-pessimistic, noting only that they were more downbeat than those of most institutions and private sector analysts.

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