ECB's Trichet Opens The Door To Further Rate Cuts

(RTTNews) - Soon after the European Central Bank made its biggest ever rate cut as the 15-nation economy entered into a recession for the first time, ECB President Jean-Claude Trichet left open the possibility of further rate reductions by suggesting that inflation risks have dimensioned significantly.

At its meeting held in Brussels, the Governing Council lowered the key-lending rate, which is the minimum bid rate on the main refinancing operations by 75 basis points to 2.50%. Economists had expected the central bank to opt for a 50 basis point cut.

"Since our last meeting, the evidence that inflationary pressures are diminishing further has increased and, looking forward, inflation rates are expected to be in line with price stability over the policy-relevant horizon," said Trichet from Brussels in his remarks accompanying the rate decision.

Inflation in the euro area continued to ease for the fourth straight month in November after having remained steady in July. According to a flash report from the Eurostat, annual inflation eased to 2.1% in November from 3.2% in October.

Trichet reasoned that the decline in inflation rates is due mainly to the fall in commodity prices and the significant slowdown in economic activity.

"Largely related to the effects of the intensification and broadening of the financial turmoil, both global demand and euro area demand are likely to be dampened for a protracted period of time," said the ECB chief.

Trichet offered an gloomy economic outlook, saying that since September, there has been an intensification and broadening of the financial market turmoil.

"Tensions have increasingly spilled over from the financial sector to the real economy, and the world economy as a whole is feeling their adverse effects," noted Trichet. "Looking further ahead, on the basis of our current analysis and assessment, we see global economic weakness and very sluggish domestic demand persisting in the next few quarters."

"The economic outlook remains surrounded by an exceptionally high degree of uncertainty. Risks to economic growth lie on the downside," acknowledged Trichet.

On November 6, the ECB had lowered its key interest by 50 basis points to 3.25% following another 50 basis points cut on October 8. The rate cut decision on October 8 was a coordinated and unprecedented move along with the other major central banks in the world and it followed a scheduled meeting on October 2, when the ECB maintained its rates unchanged.

Earlier Thursday morning, the Monetary Policy Committee of the BoE decided to reduce the official Bank Rate paid on commercial bank reserves to 2% from 3% as expected. This rate cut has brought interest rate to the level last seen in October 1939.