4th UPDATE: Trichet: Econ Slowdown To Be Protracted
Thursday December 4th, 2008 / 16h27
(Adds market reaction.) By Christopher Emsden DOW JONES NEWSWIRES ECB President Jean-Claude Trichet Thursday warned of a protracted economic slowdown while outlining the thinking behind the central bank's largest-ever interest rate cut. Inflation risks are diminishing and monetary data are also slowing significantly, he said, adding that sluggish domestic demand in the 15-nation euro area would be persistent. The ECB, meeting in Brussels, cut its policy interest rate to 2.5% from 3.25%. The euro briefly dipped on the news but bounced back. Euro-zone stocks did the same, while government bonds kept their recent gains, and in some cases were at record low yields. Trichet said the cut would contribute to financial stability while the ECB would "continue to monitor very closely" all economic developments. Such language has in the past indicated that the ECB is weighing further rate cuts. Earlier Thursday, the ECB's interest rate cuts were outpaced by the Bank of England, which cut by 100 basis points to 2.0%, and Sweden's Riksbank, which cut by a whopping 175 basis points to 2.0%. While the ECB was not so aggressive, it did cut by more than the half-percentage point expected by a majority of bank analysts. "We are not all in the exact same situation," Trichet said, noting that interest rates had been higher in both the U.K. and Sweden this summer. He also tossed aside suggestions that the euro zone faced any risk of deflation, a general downward trend in prices that Federal Reserve officials have warned is a growing risk. "Deflation is different from disinflation," Trichet said. Annual euro-zone inflation declined at the fastest rate ever in November. Trichet unveiled new ECB staff projections showing that inflation next year should run around 1.4%, then climb to around 1.8% in 2010. Both are below the ECB's 2.0% ceiling and highlight the room for further interest rate cuts. "The disinflationary process is very clear, and extends into 2010," Trichet said. "Meeting their target is a key dovish signal," said Aurelio Maccario, chief euro-zone economist at UniCredit SpA in Milan. But Trichet emphasized that the ECB viewed the inflation decline as being mostly due to falling commodity prices. Inflation rates may fall sharply next year, but the effect may be brief, he said. The ECB's objective is price stability over the medium term, he stressed. Ten-year yields on German bunds slipped below 3.0% in Thursday trading, their lowest ever. That suggests a long period of weak growth and consequently inflation, said Calyon analyst Orlando Green. "What strikes me is that they do not mention recession," UniCredit's Maccario said of the ECB. In the third quarter, the euro-zone as a whole entered a recession, defined as two consecutive quarters of contracting gross domestic product. The new ECB staff projections forecast that euro-zone GDP will contract somewhere between zero and 1.0% next year before rebounding with a 1.0% expansion in 2010. That sharp and protracted slowdown has pushed some investors to price in ECB rates of 1.5% by mid-2009. Trichet declined to comment on market expectations but said Thursday's rate cut reflected the governing council's recognition that inflationary pressures are falling quickly. Asked whether the cut was unanimous, Trichet said it was based on consensus. Diverging views on the 21-member governing council, as well as the presence at Thursday's meeting of French Finance Minister Christine Lagarde, may have made Trichet "more uncertain and cagey than usual," said Calyon's Green. "We may not see this pace in monetary easing going forward," Green added. Trichet said there was "reason to consider" a significant economic recovery could begin in the second half of 2009. That may depend on government measures. Trichet said it was important for euro-zone members to preserve fiscal rigor but emphasized that the Maastricht rules are medium-term goals and allow for flexibility. "Where room for maneuver exists, additional budgetary measures could be effective, provided they are timely, targeted and temporary," Trichet said. -By Christopher Emsden, Dow Jones Newswires; +39-02-58-21-99-05; chris.emsden@dowjones.com (Monica Houston-Waesch and Roman Kessler in Frankfurt contributed to this report.) Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=G8rN%2BJs%2FXaaSgxy4%2FPCYtg%3D%3D. You can use this link on the day this article is published and the following day.
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