The European Central Bank kept interest rates on hold at 2.0% on Thursday but signaled it may resume cutting, although zero rates were not “appropriate” for the euro zone at the moment.
ECB President Jean-Claude Trichet said he did not exclude the chance that the Governing Council would lower borrowing costs rates at its next policy meeting in March, when it will have new data and staff forecasts on the troubled euro zone economy.
Thursday’s rate freeze halted the most aggressive series of ECB cuts in history, which slashed benchmark credit costs by 225 basis points from October’s peak of 4.25%. However, with the economy falling deeper into recession by the week and signs that inflation is heading to worryingly low levels, economists are sure it is just a pause.
Trichet strengthened these expectations. “We confirm that 2% is not the lowest level,” he told a news conference. “I don’t exclude that we could decrease rates at our next meeting.”
Many leading central banks have cut their rates close to zero, but Trichet played down the chance that the ECB would follow suit. “Zero interest rates at this moment is not something we could consider appropriate,” he said.
The US Federal Reserve, the Swiss National Bank and the Bank of Japan have already reduced credit costs below 1%. The Bank of England cut British rates to 1.0% earlier on Thursday.
Thursday’s decision had been widely expected, as Trichet virtually ruled out a cut after the last rates meeting when he said the next important “rendezvous” for monetary policy would be in March. All but three of 85 economists polled by Reuters had expected the ECB to leave rates unchanged this time around. The majority expect the central bank to resume the easing cycle next month with another 50 basis points cut.
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Trichet and other ECB policymakers have cautioned against very low euro zone rates, but Cyprus central bank governor Athanasios Orphanides has exposed a difference of views on the Governing Council, saying rates should be cut hard and fast.
Median expectations in the Reuters poll are for ECB rates to bottom at 1.0% in the second quarter as the economy contracts and inflation falls further below the ECB’s medium-term goal of below, but close to 2%.
Trichet also said inflation risks are diminishing and should remain in line with the ECB’s target. The euro zone and its big trading partners were undergoing an extended period of significant economic downturn, he noted. Inflation in the 16-country bloc eased to 1.1% in January, the lowest in almost 10 years and well under the ECB’s target of below, but close to 2%. (Reuters)