European Central Bank (ECB) President Jean-Claude Trichet highlighted slumping economies and a pessimistic growth forecast for this year in an interview released yesterday, 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 US magazine Institutional Investor in comments posted on its Web site.
“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,” he said.
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 1 percent as the average for growth” in the 16-nation area this year.
His comments underpinned speculation the ECB governing council could lower its main lending rate again next Thursday, following three successive rate cuts since October to its present level of 2.5 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 EU’s Eurostat data agency reported that eurozone inflation fell to 1.6 percent last month, the lowest level in more than two years and well below the ECB’s target of just below 2 percent.
Inflation has fallen sharply since the middle of last year as oil prices plunged from record highs, and some economists say 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.
Such “solid anchoring” of expectations would also help “protect against the possible threat of deflation,” he added, while stressing there was no such threat at present.
Inflation has fallen faster than expected however as global economies hit the skids.
Eurozone manufacturing activity hit an all-time low last month, according to a widely watched survey, marking its seventh consecutive monthly drop.