ECB Maintains Current Interest Rates But Hints at Future Cuts | Europe| News and current affairs from around the continent | DW | 05.02.2009
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ECB Maintains Current Interest Rates But Hints at Future Cuts

The European Central Bank (ECB) kept borrowing costs on hold at 2 percent Thursday but signaled that it might press on with its rate-cutting cycle when it meets next month.

Jean-Claude Trichet, President of the European Central Bank

Trichet hears the concerns but prefers to wait before cutting interest rates

Speaking at a press conference following the bank's governing council meeting, ECB chief Jean-Claude Trichet said: "I don't exclude that we could decrease rates at our next meeting."

While 2 percent was not the lowest level the bank would consider, Trichet said, "zero interest rates are not something we think is appropriate," he said.

Thursday's ECB meeting in Frankfurt came in the wake of the Bank of England (BoE) announcing in London a 50-basis points cut in the cost of money, which brought the country's rates down to 1 percent.

In the meantime, the ECB appears to be attempting to buy time as it assess the total of 225 basis points of rate cuts that the bank has delivered since October last year.

"We are in an uncertain universe," he said. "We have to be prepared for everything."

ECB to address "absence of confidence"

Trichet also said he did not exclude the bank pursuing as non-standard measures, possibly including purchases of corporate and government bonds, to help address what he said was "a absence of confidence".

In March the ECB's 22-head rate-setting council will also be able to consider the bank's new staff projections on economic growth and inflation.

Euro sculpture and European Central Bank, ECB, in Frankfurt

The ECB's spate of cuts have been put on hold

The Frankfurt-based ECB's decision to take a break in its rate-cutting cycle comes after the bank delivered a hefty 50 basis points cut last month.

Analysts who expect dwindling inflation and slumping economic growth will force the bank to reduce borrowing costs possibly to an historic low of 1.50 percent next month.

The Czech national also cut rates by 50 basis points Thursday as a sign of the economic deterioration underway in emerging Europe.

Economists also believe that the BoE's nine-member monetary committee (MPC) under governor Mervyn King will continue trimming rates as it tries to spur economic growth in the country.

"The global economy is in the throes of a severe and synchronized downturn," said the BoE said in a statement. "Output in the advanced economies fell sharply in the fourth quarter of 2008, and growth in the emerging market economies appears to have slowed markedly," the BoE said.

Annual inflation in Britain edged down to 3.1 percent in December with the nation's economy having shrunk by a sharp 1.5 percent in the fourth quarter last year and unemployment surging to near a 12- year high.

British interest rates are at a historic low with the MPC having slashed rates from 5 percent at the start of October in the hope of pulling the nation's economy out of worst of the recession since 1980.

The IMF predicts the British economy will contract by 2.8 percent in 2009 with growth in the euro zone slumping by 2 percent.

Euro zone is increasingly bad way

Meanwhile, annual euro zone inflation dropped to its lowest level in about a decade in January, tumbling more than forecast to 1.1 percent on the back of falling oil prices and a slowing economy.

At 8 percent, euro zone unemployment is now at its highest level in more than two years with companies having cut production and laid off workers across the currency bloc.

An empty purse

The euro zone faces empty purses as the crisis bites

Further underscoring the current bleak economic picture facing the euro zone, data released this week showed unemployment in Spain ballooning out by 47 percent over the year in 2008.

Figures published while the ECB was deliberating Thursday showed key German factory orders plunging by 27.7 percent year on year in December.

As a consequence, economists believe that a steady stream of grim euro zone economic data will result in the ECB also continuing to trim rates in the coming months.

However, some economists believe the normally cautious ECB will limit the March rate cut to 25 basis points.

This is particularly the case following an unexpected rise in recent key economic sentiment surveys amid hopes that the round of interest rate cuts combined with government stimulus plans will help lay the ground for an economic pickup later in the year.

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