European Central Bank president Jean-Claude Trichet today dismissed talk that the bank was preparing to cut interest rates because of crumbling confidence over the euro zone's listless growth.
ECB chief economist Otmar Issing said yesterday that a cut could not be ruled out, and Mr Trichet had fanned speculation by telling a banking forum in Beijing earlier today the ECB would do "all it can" to bolster confidence.
However, Mr Trichet later said in an interview that he was not clearing the ground for a cut in borrowing costs. Any move in the ECB's benchmark short-term rate, now at 2 per cent, would damage the bank's credibility and would send bond yields higher, he said.
The euro, which fell to an 11-month low against the yen on Mr Trichet's initial remarks, rose to the day's highs in Tokyo after he denied getting ready for a rate cut.
However, the director of the IMF's European department, Michael Deppler said today that euro zone interest rates may need to be cut if economic growth fails to pick up in the third quarter of the year.He also said that the International Monetary Fund's long-held view was that a euro exchange rate somewhere in the range of $1.20 to $1.30 was "about right".
Mr Trichet acknowledged that the 12-member euro zone was slowing down, with growth likely to be a little lower this quarter than last, when gross domestic product expanded 0.5 per cent.
Slow growth and fears over the impact of rapid European integration recently prompted voters in France and The Netherlands, two of the EU's founders, to reject a new constitution for the 25-nation bloc.
Two Italian ministers have said that Rome should quit the euro and reintroduce the lira to boost growth, and newspapers in Germany and Spain have highlighted voters' discontent with a currency they say has failed to improve their lives since it was introduced in 1999.
But Mr Trichet dismissed talk of a euro break-up as absurd.