Trichet refuses to rule out further interest rate cuts
But ECB economist warns against going too low, too quickly
European Economic and Monetary Affairs Commissioner Joaquin Almunia (left) talks with European Central President Jean-Claude Trichet during a joint Parliaments meeting on 'A New Deal for European Economic Recovery' at the European Parliament in Brussels yesterday
The European Central Bank has to prepare for exceptional situations and does not rule out further interest rate cuts to support the eurozone economy, bank president Jean-Claude Trichet said yesterday.
In an interview with China Finance, Mr Trichet said the European Central Bank (ECB) had already expanded its balance sheet in the wake of the financial market crisis.
The ECB has cut rates by 225 basis points to 2pc since last October and announced a range of measures to boost liquidity flows. It is expected to cut rates further in March.
"Experience has demonstrated that we have to prepare for exceptional situations, and I would not exclude anything, and equally I will not pre-commit to anything ex-ante," Mr Trichet said.
"We'll always look at the situation on the basis of our own analysis, taking everything into account."
In a separate interview with the Financial Times, the ECB's chief economist Juergen Stark said that cutting interest rates aggressively now would risk exacerbating uncertainty given the bank sees no risk of deflation.
"Gradualism has remained a critical aspect of our monetary policy," Mr Stark, who is also an ECB executive board member, said." Overly aggressive reductions in our policy rate when we cannot see any risk of deflation would exacerbate and not resolve uncertainty," he said.
In the last few months the ECB has undertaken the most aggressive series of interest rate cuts since its formation.
Mr Stark warned that a price stability-orientated central bank that acted only in response to fear risked losing credibility. But he also acknowledged that the ECB had to make optimal use of interest rate cuts.
"Yes, use the room for manoeuvre that is still available but not in a way that would put our reputation at risk," he was quoted as saying.
Asked whether the door was open for another significant interest rate cut on March 5, as analysts expect, Mr Stark responded: "I will not exclude anything. However, it is also clear that a potential move, independently of its size, will reduce the room for manoeuvre in the future."
He was also cautious on whether the ECB would use more alternative monetary policy tools such as direct asset purchases -- a tactic already being employed by the US Federal Reserve and the Bank of England.
"Some of the key measures adopted and applied by the Fed are based on Treasury guarantees so there is no, or limited risk, for the Fed. It is not feasible in my view to expect the ECB to do the same without government guarantees."
He said deflation was not on the cards in the eurozone at the moment. There was no knowing how financial markets would react to such low rates, while history showed that keeping rates that low for a lengthy period created its own problems. (Additional reporting Reuters)
- Ailish O'Hora
