The European Central Bank cut interest rates by 50 basis points today as the euro zone economy faces its first recession, and forecast inflation should drop to its target next year.
President Jean-Claude Trichet said that turmoil on financial markets was likely to hit the global and euro zone economies, in comments suggesting that the ECB plans to cut interest rates further at some stage.
"I don't exclude that we could cut rates again," he told a news conference. Today's cut took the ECB's benchmark rate to a two-year low of 3.25 per cent, reflecting the euro zone's sharply deteriorating economic outlook and easing inflation pressures.
According to data from the Irish Mortgage Corporation the 50-basis points cut will see average monthly repayments on a €300,000 home loan over a 30 years fall by €90.40 to €1,520.06. Over a year this would result in savings of €1,048 for the homeowner.
Until last month ECB policymakers had been reluctant to cut rates due to inflation which soared over the summer to double the ECB's ceiling. But Trichet indicated this problem was fading fast.
"The outlook for price stability has improved further. Inflation rates are expected to continue to decline in the coming months, reaching a level in line with price stability during the course of 2009," he said.
Euro zone inflation fell to 3.2 per cent in October after peaking at 4 per cent over the summer, far above the ECB's ceiling of 2 per cent. Analysts were watching Trichet's comments for any indications of further rate action the bank might take next month.
"The intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time," Mr Trichet added.
The rate cut was the ECB's second in less than a month, following an unscheduled move on October 8th in concert with other leading central banks.
Shortly before the ECB decision the Bank of England cut British rates by 150 basis points to 3 per cent, far more than analysts and markets had expected, as the UK economy heads into deep trouble.
All 81 economists polled by Reuters last week had expected today's 50 basis point rate cut as easing inflation pressures mean the ECB faces fewer problems reaching its goal of annual inflation just below 2 per cent.
The euro zone's economy, which had grown steadily since the bloc's creation in 1999, contracted by 0.2 per cent in the second quarter this year and most economists expect further shrinkage in third quarter GDP figures due on November 14th.
Reuters