European Central Bank (ECB) president Jean-Claude Trichet played down expectations of an imminent euro zone rate cut yesterday, saying he is committed to tackling inflation. Mr Trichet was attempting to quash speculation that he will quickly follow the US Fed in cutting interest rates after stocks plunged.
"Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility," he told the European Parliament in Brussels yesterday.
Bond investors dismissed his comments and raised bets on an ECB interest rate cut.
The US central bank cut its benchmark by three-quarters of a percentage point to 3.5 per cent on Tuesday after global stocks tumbled on concern a recession in the world's largest economy will curb global growth.
"Europe is not going to get special dispensation from a global slowdown," Stephen Roach, of Morgan Stanley in Asia, said on a panel at the World Economic Forum in Davos, Switzerland. "Europe is not this dynamic, rapidly-growing economy."
Euro-region service industries grew this month at the slowest pace in more than four years after credit tightened and the euro neared a record, an industry report showed yesterday.
On January 10th Mr Trichet threatened to raise the bank's key rate from 4 per cent if unions push through wage increases that take inflation into account.
Euro-region inflation was 3.1 per cent in December, the fastest in six years and well above the ECB's 2 per cent limit. He suggested yesterday that slowing growth may give the ECB more room for manoeuvre.
While the bank is sticking to its base scenario that the economy of the 15 euro nations will expand about 2 per cent this year, there are "downside" risks to the outlook, Mr Trichet said.
"We'll see how the real economy develops in the future because it can have an effect on inflation," he said. That remark "suggests any cut in rates by the ECB will only come on the back of poor economic data", said James Nixon, an economist at Societe Generale in London. - (Bloomberg)
