THE EUROPEAN Central Bank (ECB) cut interest rates to an historic low level yesterday and forecast a significant slowdown in the European and global economies this year.
The ECB reduced the benchmark interest rate, which sets variable rate mortgage costs, by half a percentage point – to 2 per cent, down from 2.5 per cent – matching an historic low in mid-2003.
ECB president Jean-Claude Trichet did not rule out further interest rate cuts, although he said the ECB would probably not move again on rates until March.
“We didn’t say that it was now the limit and we would not move any more,” he told reporters.
“It is, in historical terms, a very low level, but again I don’t say that it is the lowest point that is, in the view of the governing council, the appropriate one.”
Mr Trichet said the euro area was experiencing a “significant slowdown” related to the effect of the intensification of financial turmoil, which was now worse than the bank expected when it met in December and cut rates by three-quarters of a percentage point.
“Both global demand and euro area demand are likely to be dampened for a protracted period,” he said, while predicting the EU and global economies would recover in 2010.
He said it was a “unanimous” decision taken by the ECB governing board members to cut interest rates by half a percentage point. “We said we were anticipating future bad news that we expect coming from the real economy and further alleviation then on the inflationary risks,” said Mr Trichet, who added that he expected inflation to fall to “exceptionally low levels” by mid-year due to falling commodity and energy prices.
Inflation in the euro zone has fallen rapidly in recent months and was 1.6 per cent in December, compared with the ECB’s goal of keeping inflation below, but close to, 2 per cent.
Some economists have warned of the danger of deflation, which could provoke already cautious consumers to cut their spending even further, deepening the recession.
Mr Trichet said the level of uncertainty regarding the economy remained “exceptionally high”, but said the ECB was conscious of the danger of falling into a “liquidity trap” by lowering interest rates to “very, very low levels”.
“The problem is that once you are there it is extraordinarily difficult to get out,” said Mr Trichet, referring to the situation where interest rates are reduced to zero but still fail to stimulate the economy as borrowers continue to hoard cash and eschew investments.
He also called on euro zone states to be prudent in the adoption of exceptional fiscal measures to counter what many economists fear could be the worst recession since the Great Depression of the 1930s.
He said the additional economic stimulus measures announced by governments in recent weeks and months would put a considerable burden on public finances, which would affect “younger and future generations”.
