November 6, 2008 / 4:17 PM / 11 years ago

ECB cuts rates by 50 bps, says more action possible

FRANKFURT (Reuters) - The European Central Bank cut interest rates by 50 basis points on Thursday and signaled another reduction was possible next month, as inflation pressures ease and the euro zone faces its first recession.

“I didn’t exclude a further cut in December, depending on the data, depending on the information that will be gathered, depending on the (economic) projections that we could examine at the time, including of course the staff projections,” ECB President Jean-Claude Trichet told Reuters Television in an interview.

Earlier, he said the ECB Governing Council had discussed cutting rates by 75 basis points but was unanimous in its decision to lower them by 50. Some policymakers may have mentioned a 25 point cut but a 100 point reduction was not discussed, he added.

A Reuters poll of 57 economists taken after the rate cut showed the majority expect the bank to cut again by the year-end, with most saying by another 50 basis points.

Thursday’s widely expected move, the second such cut in just under a month, took the ECB’s benchmark rate to a two-year low of 3.25 percent.

Shortly before the ECB decision the Bank of England lowered British rates by 150 basis points to 3.0 percent, far more than analysts and markets had expected, as the British economy heads into deep trouble.

All 81 economists polled by Reuters last week had expected Thursday’s 50 basis point euro zone rate cut. However, after the Bank of England’s bumper move, some analysts were disappointed by the size of the ECB’s action.

“I think it is disappointing, to be perfectly honest,” said Neil MacKinnon, chief economist at the ECU Group, a London-based hedge fund. “I think the Bank of England has set the benchmark, bearing in mind that the Bank of England, like the ECB, is an inflation-targeting central bank.”

The Swiss National Bank also cut its interest rates on Thursday by a more conservative 50 basis points.


Trichet said euro zone inflation is likely to hit the ECB’s target of close to, but below 2 percent, next year. Euro zone inflation fell to 3.2 percent in October after peaking at 4.0 percent over the summer.

The ECB does not expect an outright fall in the HICP consumer price index in 2009 but much depends on developments in oil and commodity prices, Trichet told Reuters Television.

“On the basis of the present analysis, taking into account the present level of the price of oil and commodities and on the future markets, we will be in line with our definition of price stability in the course of 2009 with a significant decrease of HICP (inflation), but we won’t be negative, certainly not,” he said.

ECB Executive Board member Juergen Stark said in a newspaper interview earlier this week that oil price fluctuations could push inflation briefly into negative territory.

Turmoil on financial markets since mid-September appeared to be having an increasing impact on the economy, and it had generated an extraordinarily high degree of uncertainty about the economic outlook, Trichet said.

The euro zone’s economy, which had grown steadily since the bloc’s creation in 1999, contracted by 0.2 percent in the second quarter this year and most economists expect further shrinkage in third quarter GDP figures due on November 14.


Trichet’s comments showed the ECB was not preparing any action as bold as that taken by the Bank of England, said Bank of America economist Gilles Moec.

“He doesn’t want to pre-commit to future rate cuts. He clearly opens the door to future cuts, but without sending the signal they are ready to go as fast as the Bank of England,” Moec said.

Economists in the Reuters poll expected the ECB to keep cutting rates as the economy and inflation slow. The median expectation is for the main refi rate to hit 2.5 percent in mid-2009.

Figures derived from Eonia rate futures now show the market pricing in a further 50 basis point easing next month, with an eventual low of at least 2.25 percent as a decline in inflationary pressures gives the ECB room to manoeuvre.

BusinessEurope, which speaks for large numbers of European firms, welcomed the rate cut and said it expected more monetary easing in the next few months.

The European Commission said on Monday that the euro zone is already in a technical recession and predicted economic growth will come to a virtual standstill next year.

Trichet said the ECB expected banks to make their contribution to dealing with the turmoil in financial markets.

“It is equally important that the banking sector takes fully into account the significant support measures adopted by governments to deal with the financial turmoil,” he said. “These measures should be supporting trust in the financial system.” “We see no credit crunch,” he added.

Writing by Paul Carrel; editing by David Stamp

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