Brussels, 05/03/2009 (Agence Europe) - With not too many worries about price stability, the European Central Bank (ECB has decided to make its monetary policy a bit more flexible. During its meeting on Thursday 5 March, in which Eurogroup president, Jean-Claude Juncker and the Commissioner for economic and monetary affairs, Joaquin Almunia, participated, the Council of governors opted for a cut in Euro-zone interest rates of 50 basis points. As from 11 March, interest rates applied to major refinancing operations will therefore by 1.50%. The marginal lending facility will fall from 2.50% to the 0.50% deposit facility rate. This is the second cut in the year and is on the same scale as January and the pause observed in February. Accumulated rate cuts since October 2008, at the time the crisis intensified, is now 275 basis points.
Inflation rates decreased significantly and are expected to remain, “well below 2% over 2009 and 2010”, indicated Jean-Claude Trichet at the end of the meeting. After the decision taken today, “we expect price stability to be maintained over the medium term, supporting the purchasing power of Euro area households”, explained the president of the ECB during a press conference. He then explained that they had not decided whether they had reached the lowest level yet and suggested that another cut may be possible. Trichet confirmed that everything would depend on the ECB's next evaluations. Mr Trichet did not, however, state that he had the intention of moving towards zero interest rates. Judging by the current “very, very low current rates”, Trichet confirmed that he did not favour such an option (zero rates presented “many disadvantages”, contrary to what happened in the US, Japan and United Kingdom. On Thursday, the Bank of England brought down its main rate down to 0.5% and also announced quantitative measures (it want to purchase £75bn shares in order to support the economy of the country by increasing money supply).
The ECB is not in this situation, although non-traditional measures exist. Although it against pointed out that providing unlimited liquidity over a one to six week period was generous in terms of eligible collateral, the ECB had already used what it considers untypical measures. Mr Trichet said that he was not ruling anything out, “we will discuss both the pertinence of new non-traditional measures and their possible procedure”. He confirmed the possibility mentioned on Tuesday by the presidents of the Bundesbank and Banque de la France (perhaps in the form of a sovereign bonds purchase). Mr Trichet explained that, “despite the tensions in the financial markets, the transmission mechanism of monetary policy is not significantly hampered in the Euro area”. He also affirmed that the cuts decided on by the ECB appeared “to be increasingly being passed through to bank lending rates”.
Global demand and internal Euro-zone demand will decline in 2009 before gradually rising, explained Trichet in his presentation of the most recent EC forecast services. In 2009, GDP is expected to fall between -3.2% and -2.2%, whereas the growth band will be between -0.7 and 0.7%. Risks for economic activity appear to be globally more balanced than in the past, despite uncertainties concerning the impact of the crisis on the real economy. After the peak reached in mid-2008 (4%), inflation has not ceased to fall before slightly increasing again in February to 1.2% (as opposed to 1.1% in January). Mr Trichet insisted that although in coming months inflation rates at temporary low rates could not be excluded, “the risks of deflation in the Euro-zone are limited”. According to next forecasts from the ECB, which considerably revised its forecasts downwards compared to those of last December, price rises could oscillate between 0.1% and 0.7% for 2009 and 0.6% and 1.4% for 2010. (A.B./trans/rh)