ECB Leaves Rates at 2%, Trichet Leaves Door Open for March Cut but Writes Off Zero Interest Rates

The European Central Bank said at 7:45 ET today that they would leave rates unchanged at 2.00 percent, as expected. As usual, though, it was ECB President Jean-Claude Trichet's subsequent news conference at 8:30 ET that drove price action for the euro.

Mr. Trichet's comments initially came across as being very dovish, as he noted that the Euro-zone economy was in a period of downturn, and that economic weakness would persist in coming quarters. On the inflation front, he maintained confidence that the ECB would keep mid-term inflation close to 2 percent, but overall, the level of uncertainty was exceptionally high and the risks to growth were clearly on the downside.

In terms of interest rate expectations, Mr. Trichet left the door open for a rate cut during their March 5 meeting, when the ECB will publish new inflation and growth outlooks. However, he essentially wrote off the possibility of cutting rates to zero, noting that such a level was not appropriate as there are a number of drawbacks that come with bringing rates to such low levels. In light of the Bank of England's more neutral stance on monetary policy following their rate cut to 1 percent at 7:00 ET, there is increased potential for EUR/GBP declines in the near-term.