ECB chief notes gloomy forecasts

January 8, 2009

, FRANKFURT, Jan 8 – European Central Bank president Jean-Claude Trichet highlighted slumping economies and a pessimistic 2009 growth forecast in an interview released late on Wednesday, raising chances for an interest rate cut next week.

"It\’s clear that we have had a significant deterioration in the real economy," Trichet told the magazine Institutional Investor.

"What strikes me is that the most recent projections are also the most pessimistic. And this is true at a global level, not particularly at the level of Europe."

The ECB chief had already noted that forecasts by the staff at the bank and its member eurozone national banks "mention a range of zero to minus one percent as the average for growth" in the 16-member area this year.

His comments underpinned speculation the ECB governing council could lower its main lending rate again on January 15, following three successive rate cuts since October to its present level of 2.50 percent.

Economic indicators for the recession-hit eurozone leave the ECB with plenty of room to lower the cost of borrowing in a bid to jumpstart economic activity.

On Tuesday, the European Union\’s Eurostat data agency reported that eurozone inflation fell to 1.6 percent in December, the lowest level in more than two years and well below the ECB\’s target of just below 2.0 percent.

Inflation has fallen sharply since mid-2008 as oil prices plunged from record highs, and some economists say that a slide into deflation cannot be ruled out.

"In the present circumstances, it is more than ever important that inflation expectations are firmly anchored," Trichet said, meaning markets and the public should understand the bank would maintain inflation near its target, by cutting rates if necessary.

Eurozone manufacturing activity, meanwhile, hit an all-time low in December according to a widely watched survey, marking its seventh consecutive monthly drop.

The eurozone slipped into recession in the third quarter of 2008, with gross domestic product contracting for two consecutive quarters for the first time since the currency bloc was formed in 1999.

Analysts now expect the ECB to cut its main lending rate to at least 1.5 percent early this year, below its current all-time low of 2.0 percent.

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