Zero interest rates have disadvantages for the euro area and the European Central Bank is still considering other actions to boost the economy, ECB President Jean-Claude Trichet said today.
Trichet said in media interviews that 2009 would be a very difficult year for the euro zone economy but very low inflation would help to support shoppers' purchasing power.
The ECB had already taken unprecedented action to support the economy, cutting rates by 2.75 percentage points to a record low of 1.5 per cent and providing banks with unlimited liquidity.
But it was reluctant to go as far as central banks in countries like the United States, Britain, Japan and Canada in cutting rates to the bone to combat the recession.
“As I have said when I have reported on the Governing Council's deliberations, we feel that there are a number of disadvantages associated with zero rates,” Mr Trichet said in an interview with the Robert Schuman Foundation think-tank, published on its website today.
The comments highlight the division between the ECB and other central banks in their policy response to the financial crisis.
The Bank of Japan earlier confirmed its rates at 0.1 per cent and boosted purchases of government bonds, while minutes of the Bank of England's March meeting showed decisions to cut rates to a record low of 0.5 per cent and launch an asset-buying program were unanimous.
The US Federal Reserve is seen keeping rates on hold at zero to 0.25 per cent later on Wednesday and markets are keen for clues on whether it will expand its credit easing program, including by buying US Treasuries.
Trichet told France's Europe 1 radio that the ECB was ready to take extra steps to boost the economy if needed.
Asked whether the ECB could follow its US and UK counterparts in directly buying assets, for example bonds, to boost the economy, he said: “We are considering at the moment whether it is appropriate to take complementary measures which would not necessarily be identical with those that our colleagues have taken.”
In a speech in Paris late last night, he said the financial structure of the euro zone was different to the US in that it was centred around banks and not capital markets.
“This explains clearly the different approaches adopted on both sides of the Atlantic," he said.
Analysts and traders expect the ECB to reduce rates to 1 per cent or lower by the middle of the year but policymakers have made it clear they see the room for further cuts is diminishing.
Trichet said the ECB had cut rates in an extremely rapid and significant manner because inflationary pressures were declining, and had not decided whether the current rates were the lowest possible.
“The year 2009 will be very, very difficult,” he told Europe 1. “At the same time, there is quite general agreement between all public and private institutions that 2010 may be the year of moderate recovery in growth.”
“We remain vigilant and in the monetary sphere as in the budgetary sphere what is important is to take bold decisions immediately where necessary and at the same time to reassure and inspire confidence on our capacity to maintain price stability in the medium and long term.”
The ECB aims to keep inflation - which was 1.2 per cent in February - below but close to 2 per cent. He told the Robert Schuman Foundation that inflation was expected to be very low around mid-year.
Reuters