European Central Bank Continues Slashing Interest Rates

While the global economy dominated talks at London’s G-20 summit, European Central Bank President Jean-Claude Trichet continued lowering interest rates on Thursday, but said one of those rates has probably reached the floor.

The ECB’s Governing Council lowered the bank’s benchmark interest rate 25 basis points to 1.25% - a rate Trichet said could be further lowered, albeit “in a measured way.” The ECB also lowered the deposit rate 25 basis points to 0.25%, an “extremely low level” that Trichet said is likely the floor, Bloomberg reported.

Most analysts expected the ECB to lower the benchmark rate to 1.0%. Trichet said such is possible next month, in addition to employment of “non-standard measures.”

“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,” he said.

One speculation is that the ECB will take a cue from the U.S. Federal Reserve, Bank of Japan and Bank of England, and buy government and corporate bonds in hopes of lowering longer term interest rates and boosting economic growth, a policy known as quantitative easing.

“Our interpretation of this is that the council has still not yet made up its mind on what new non-standard measures it would take,” Julian Callow, an economist at Barclays Capital in London, told Bloomberg. “But Trichet did appear to suggest that the mood on the Governing Council was not to follow the Fed and Bank of England in printing money via an aggressive asset-purchase program.”

Trichet said today’s decision takes into account the short-term expectations that commodity prices will stay low and global economic activity will continue backpedaling. Trichet believes euro and global demand will remain “very weak” throughout 2009 and gradually recover over the course of 2010.

Taking baby steps with monetary measures is the best way to balance the risks, he said.

“On the one hand, there may be stronger than anticipated positive effects due to the decrease in commodity prices and to policy measures taken,” Trichet said in a statement. “On the other hand, there are concerns that the turmoil in financial markets could have a stronger impact on the real economy, as well as that protectionist pressures could intensify and that there could be adverse developments in the world economy stemming from a disorderly correction of global imbalances.”

The new rate is the lowest since the ECB took the reigns of monetary policy in 1999. Since October, the bank has cut 3 percentage points from the benchmark rate.

Trichet made a special point to say that the ECB is keeping a careful watch on inflation. Over the medium term, the bank “will continue to ensure a firm anchoring” of its 2% target.

Subscribe by RSS Subscribe by Email