ECB chief Trichet hints at rate cut in January
The euro-area economy is fighting its first recession in 15 years. JOHN MACDOUGALL/AFP/Getty Images
Wednesday December 31 2008
EUROPEAN Central Bank president Jean-Claude Trichet appeared yesterday to allow for a January interest rate cut by stressing that inflation should not fall much below 2pc.
Responding to questions in an interview with the German financial daily Boersen Zeitung, the ECB chief said: "We are concentrating at present on the impact of our previous decisions."
Several bank directors and governors, including Trichet, have sought to dampen such speculation, but with inflation falling much faster then expected, the threat of deflation has recently begun to surface.
His comments came as new figures showed loans to households and companies in the euro area slowed for the 11th month in succession after banks tightened credit standards.
Private sector lending rose 7.1pc in November after an increase of 7.8pc in October, the European Central Bank said yesterday. That's the lowest level in four years.
M3 money supply, which the ECB uses as a gauge of future inflation, slowed to 7.8pc from a year earlier as demand for the most liquid assets retreated.
Economists had expected the rate to decelerate to 8.5pc from 8.7pc in October, the median of 28 forecasts in a Bloomberg News survey shows.
The euro-area economy is fighting its first recession in 15 years and the Eurosystem staff expects growth to contract in 2009. Retreating commodity prices and easing inflation pressure allowed the ECB to lower borrowing costs by a total of 175 basis points since early October, and more rate cuts may follow as early as January.
"The ECB will continue to watch money-supply growth, but it is aware of the fact that we're seeing safe-haven and portfolio effects," said Michael Schubert, an economist at Commerzbank AG in Frankfurt.
"Policy makers don't care about investment shifts. They'll look at the availability of loans and there we have to fear a crunch."
Credit standards for loans to companies tightened "significantly" in the third quarter and should remain "broadly unchanged" in the final three months of 2008, the ECB said in its latest quarterly bank lending survey. Meanwhile, the euro interbank offered rate, or Euribor, that banks charge each other for three-month loans, fell to the lowest level since May 31, 2006, according to data from the European Banking Federation. The rate fell four basis points to 2.93pc yesterday, the EBF said. (Bloomberg)
