The head of the European Central Bank hinted Thursday that policy-makers for the 16-nation currency could announce further non-standard policy measures in the next rate-setting session in May.
In comments following the bank's decision to cut its benchmark interest rate by a quarter percentage point, ECB President Jean-Claude Trichet also signaled that there is still room to cut the benchmark interest rate for Eurozone and said the world economy is undergoing a severe downturn.
The European Central Bank on Thursday lowered its key interest rate by 25 basis points to a new low of 1.25%, defying expectations for a larger reduction of 50 basis points.
In its meeting held in Frankfurt, Germany, the Governing Council of the central bank also reduced the interest rate on marginal lending facility and that on the deposit facility to 2.25% and 0.25%, respectively.
In his introductory statement, Trichet said, Both global and euro area demand are likely to remain very weak over 2009, before gradually recovering in the course of 2010.
The central bank chief said the Governing Council will continue to ensure a firm anchoring of medium-term inflation expectations.
Such anchoring is indispensable to supporting sustainable growth and employment and contributes to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.
Trichet is hopeful that external as well as domestic demand should increasingly benefit from the effects of the significant macroeconomic stimulus under way as well as from measures taken to restore the functioning of the financial system both inside and outside the euro area. Further, the significant decline in commodity prices has underpinned real disposable income and thus consumption, he noted.
Considering all this, policymakers view that the risks to the outlook for economic activity are broadly balanced, Trichet's statement read.
On the inflation front, policymakers expect headline annual inflation rates declining further in the coming months and temporarily reaching negative levels around mid-year. Such short-term movements are, however, not relevant from a monetary policy perspective, Trichet said. Annual HICP inflation dropped to 0.6% in March from 1.2% in February, according to the flash estimate from Eurostat.
Going forward, Eurozone rate setters expect annual inflation to remain below 2% in 2010 largely due to ongoing sluggish demand. ECB aims to keep inflation rates at levels below, but close to, 2% over the medium term.
The ECB was widely expected to announce non-conventional policy measures after the latest rate-setting session.
Responding to reporters' questions, Trichet said he would announce full details of any further non-standard measures next month. He also hinted at possible rate cuts, saying he is not ruling out a measured approach to taking the key interest rate down further. He was clearer on the deposit rate, saying he did not expect any move from the present level of 0.25%.
For comments and feedback: contact firstname.lastname@example.org