The European Central Bank flatly rejected calls for a cut in interest rates to help reverse an economic slowdown across Europe that has been partly blamed for a political crisis in the European Union.
The best remedy for lumbering growth and mass unemployment, which has angered voters - prompting a resounding "No" to the EU constitution - is for the central bank to deliver low inflation, ECB president Jean-Claude Trichet said.
"I am not telling you anything that could be interpreted as preparing a rate cut," Mr Trichet said after the central bank kept official rates at their historic low of 2 per cent despite mounting pressure to cut.
The ECB president also united with political leaders in calling "absurd" any talk that European monetary union could splinter if slow-growing countries like Italy and Germany grew frustrated with a one-size-fits-all monetary policy.
"I don't comment on absurd questions. If your question is whether or not there is a likelihood for California or Alaska or Florida to have its own currency, I would do in exactly the same fashion - complete nonsense," he said at a news conference.
Mr Trichet said the central bank could inspire confidence in European monetary union by cleaving unwaveringly to its price stability mandate, while politicians reform sluggish economies to boost job creation and raise the growth rate, he said.
"We unanimously think that the present interest rates are appropriate and that if we would move them we would not augment, if I may, our faithfulness to our mandate," he said.
The No votes by the Netherlands and France to the EU constitution have only hardened the central bank's resolve to guarantee stable prices and a credible currency, which keeps market interest rates low, Mr Trichet said.
"It reinforced our sentiment of responsibility. Improving confidence is really of the essence and it is what we try to do in the present circumstances, which are exceptional," he said.
Moreover, if inflationary risks mount, the ECB stands ready to raise interest rates when necessary, he said.
Markets were a little surprised by the strength of his protestations.
"Trichet's comments are more hawkish than the market may have expected," said Jon Lee, international rate strategist at Barclays Capital in London.
The euro, which lost about 3 per cent after the votes in France and the Netherlands, on Sunday and Wednesday respectively, from a level of about $1.25 last Friday, recovered some ground yesterday, trading close to $1.23.
"We have run so far on the euro in such a short period of time," said Andrew Busch, global FX strategist at Harris Nesbitt in Chicago.
"We saw some recovery in the euro but it's just profit-taking. There is no change in the overall picture," said Robert Bergqvist, head of strategy at SEB Merchant Banking.
The ECB cut its euro-zone projections for the next two years, bowing to disappointing economic performance. GDP growth this year is now expected to be 1.4 per cent, down from a previous projection of 1.6 per cent. The 2006 figure was cut from 2.1 per cent to 2 per cent.
The action brings the ECB's economic outlook more in line with those of the European Commission and OECD.
