A cut in eurozone interest rates in coming months became significantly more likely on Thursday after the European Central Bank acknowledged the gloomier economic outlook and softened its hardline stance on rate moves.
Jean-Claude Trichet, ECB president, cleared the way for a significant downgrade soon in the central banks’ growth forecasts and did nothing to correct financial market expectations of a quarter percentage point cut in borrowing costs in the 15-country region in April, or even earlier.
His comments came just hours after the Bank of England reduced UK interest rates by a quarter percentage point to 5.25 per cent, citing deteriorating global growth outlook.
The British central bank gave no indication of future rate moves, pledging to “balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term against the risk that elevated inflation expectations keep inflation above target”.
Many analysts were disappointed that the Bank was still concerned about risks of inflation remaining too high for comfort, but investors took the Bank’s action in cutting rates as a better signal of its future moves than its more cautious words.
The ECB’s main interest rate was kept at 4 per cent.
Separately, the ECB announced two more emergency liquidity injections of €60bn each into three-month money markets, repeating similar moves last year and making clear it saw significant tensions remaining in financial markets.
So far, the ECB and Bank of England have resisted copying the emergency steps take by the US Federal Reserve to boost economic growth and Mr Trichet on Thursday warned that a US-style fiscal stimulus package was not warranted in the eurozone.
Mr Trichet gave no indication about the timing of any interest rate changes but softened considerably his tone compared with that he took after the last ECB meeting in January, when he had warned of a possible “pre-emptive” interest rate increase to head-off inflationary threats posed by wage deals.
Analysts said his comments could allow the ECB to use its March meeting to signal that a cut in borrowing costs was likely a month later. Thursday’s change in Mr Trichet’s language, which emphasised the “unusually high uncertainty” about the economic outlook, meant“they are taking it really one day at a time, right now,” said Erik Nielsen of Goldman Sachs.
Financial markets have priced in more interest rate cuts after April, and the euro weakened in response. But Mr Trichet still underlined the ECB’s hawkish instincts, stressing its determination to prevent current high inflation rates become entrenched. Eurozone inflation, at a 14-year high of 3.2 per cent, is significantly above the ECB’s target of an annual rate “below but close” to 2 per cent.