Trichet says ECB rates could be reduced further to 1%

ECB PRESIDENT Jean-Claude Trichet says the bank may reduce its benchmark interest rate again by a quarter point to 1 per cent when it meets in May.

One further rate cut is not excluded, as already indicated, Mr Trichet said in an interview with Japan’s Kyodo News while on a tour of Japan. The additional possible cut would be very measured, Mr Trichet said, adding he considered 25 basis points to be measured.

Kyodo also quoted Mr Trichet as repeating the view that slashing rates to zero was not at all appropriate in the euro zone.

The Frankfurt-based European Central Bank this month lowered its benchmark by a quarter point to 1.25 per cent and Mr Trichet signalled that similar step was likely in May.

Policymakers are divided over how low to take borrowing costs and also on what new measures they should implement to stem the euro region’s worst recession since the second World War.

While Germany’s Axel Weber says 1 per cent should be the lower limit, others want to keep open the option of deeper cuts.

Mr Trichet said the deposit rate – the rate steering all-important money market rates – will not change from its current level of 0.25 per cent in the period to come. The ECB’s benchmark interest rate now stands at an all-time low of 1.25 per cent. It has lowered it by 3 percentage points since October and analysts expect it to make one final quarter point cut to 1 per cent in May.

Even though the euro area is struggling with the worst recession since the creation of the single currency, the ECB has repeatedly ruled out cutting rates to zero. A number of top ECB policymakers have said they are equally reluctant to take them below 1 per cent as it would risk paralysing money markets and send the wrong signal.

In another interview with Jiji Press, Mr Trichet touched on the troubles being experienced by some eastern and central European countries, urging banks that have lent in the region to keep lending. “The message that we are giving to the banks in the euro area is that they have responsibilities in those countries where they have subsidiaries or interest, and we recommend them to continue to be as responsible as possible,” he said, according to an English language transcript seen by Reuters.

At the same time he said that there were safety nets in place to help countries being crippled by the crisis.