Sunday, April 19, 2009

ECB’s Trichet Won’t Exclude Cut, Says Zero Rates Inappropriate

European Central Bank President Jean-Claude Trichet said he wouldn’t exclude another “very measured” rate cut, though a zero interest-rate policy wouldn’t be appropriate for the bank.

“In the last press conference I said that we did not exclude to engage in a further decrease of rates which would be ‘very measured,’” Trichet said in response to a question in Tokyo today. “I have nothing to add to what I said in my last press conference.” Policy makers don’t consider that “a zero rate policy would be appropriate” for the ECB, he said.

The bank this month cut its benchmark rate less than economists had forecast, by a quarter point to 1.25 percent, and delayed a decision on new, so called non-standard policy tools such as purchases of debt securities until May 7.

Policy makers on the ECB’s 22-member council are divided over the best way to stem the euro region’s worst recession since World War II. Germany’s Axel Weber has ruled out cutting the ECB’s key interest rate below 1 percent and said he doesn’t want to buy debt securities. Greece’s George Provopoulos and Athanasios Orphanides of Cyprus want to keep open the option of deeper rate reductions and asset purchases to fight the risk of deflation.

Trichet said there was no split among the Governing Council. He declined to comment on any possible non-standard measures the bank may decide at its May 7 meeting.

Over Interpretation

“I would warn you against over interpretation of what is said by my colleagues,” he said. Council members are obliged to explain what the bank is doing “in their own languages to 329 million fellow citizens.”

The European Central Bank governor said yesterday the ECB would do everything possible to restore confidence and prosperity.

“As regard to what we will do, we will decide and explain not only to the market but also to our fellow citizens” on May 7, he said.

Trichet said European inflation expectations were “anchored.” The most recent reading of inflation expectations in the euro area was 1.9 percent, near the central bank’s target of below or close to 2 percent, he said. Since the euro was established, inflation expectations oscillated between 1.7 percent and 2 percent, he said.

Trichet said that policies to improve social security would lead to declines in precautionary savings in Asia and particularly China, helping to increase consumption. This would help reduce global imbalances, caused by low saving rates in countries like the U.S. and high saving rates in Asia and China, which contributed to the present financial crisis.

“There is consistency in the desire of the Chinese authorities to augment domestic consumption,” Trichet said. “I would praise them and encourage them to go resolutely in this direction.”