ECB Trichet: Won't Rule Out "Measured" Rate Cut

TOKYO -(Dow Jones)- European Central Bank President Jean-Claude Trichet on Saturday raised the prospect of another "very measured" rate cut in the euro zone, and anticipated that the bank would take further unconventional easing measures when its Governing Council next meets May 7.

Trichet refused to discuss specifics of what the bank might due at the meeting. Instead, he noted that after the bank's last meeting in early April, "we did not exclude to engage in a further decrease of rates which would be very measured."

He noted that he had also called the council's decision at the April meeting for a 25 basis point rate cut, when many in the market were expecting a 50 basis point cut, "very measured." That suggests the ECB will cut rates by another 25 basis points next month to 1.0%.

"We have a rendezvous the seventh of May and we will decide on further non-standard measures," he said. But he said the bank was already engaged in non-standard measures, such as its provision of unlimited loans to banks at fixed interest rates, for up to six months.

Trichet added that he didn't believe a zero interest-rate policy would be appropriate for the 16-member euro zone.

Trichet's remarks came after a speech to the Foreign Correspondents' Club of Japan that provided a broad overview of the underlying causes of the financial crisis and global economic slowdown. Among the causes he cited were a synchronized decline in risk premiums across markets and an insufficient focus on the medium term by macro policy makers.

He also cited a global imbalance of savings and investments that fueled international capital flows in search of higher yields and helped inflate the recent bubble. The provision of more social services by governments in emerging Asia, including China, would encourage residents to spend more and save less, and would help stabilize economies that have suffered in the current downturn because of their focus on exports rather than domestic demand.

To fight the deepening recession, the ECB has cut interest rates to their lowest level in the bank's 10-year history, but has resisted the more aggressive quantitative easing measures that central banks in the U.S., U.K. and Japan are using to try to spur economic activity and revive local credit markets.

ECB watchers lately have detected rare public fault-lines in the Governing Council, with some members favoring programs to buy up corporate debt and others arguing that the ECB should continue focusing on providing liquidity to banks, which are the main source of financing to corporations in the euro zone.

Trichet on Saturday denied any rift among the bank's policy makers.

"There is no split in the Governing Council. We have a very, very united Governing Council," he said. There should be "no over-interpretation of what is said by my colleagues. My colleagues have to speak in their own language, to 329 million fellow citizens, and to explain what we have been doing."

He rejected allegations that the ECB has been too slow or timid in its response to the crisis, noting that it was the first central bank to begin extraordinary provision of liquidity to money markets during the crisis, back in August 2007.

With many observers now believing that the prolonged period of low interest rates in the U.S. fed the housing bubble the collapse of which triggered the current crisis, Trichet said critics no longer argue that the ECB was too "orthodox" in its monetary policy or kept rates too high.

He also defended the ECB's traditional focus on fighting inflation. Unlike some other central banks, the ECB isn't also charged with promoting economic growth, but only with maintaining price stability in the euro zone.

"We trust that this solid, medium-term anchoring of inflation expectations is part of our duty to be a solid anchor of stability and of confidence, and we can tell our fellow citizens: You can have confidence in the fact that we are there as a solid anchor and we will deliver what we say we'll deliver - price stability over the medium term - and we are trusted to be able to deliver."

-By Michael S. Arnold, Dow Jones Newswires; 81-3-5255-2929; michael.arnold@dowjones.com

(END) Dow Jones Newswires

April 18, 2009 05:34 ET (09:34 GMT)

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