ECB cuts interest rates

The European Central Bank yesterday cut interest rates, the fifth reduction in six months, bringing borrowing costs in the eurozone to a historic low of 1.5 per cent.

ECB Governor Jean-Claude Trichet did not exclude the possibility of futher cuts in the coming months, reflecting a decaying European economy adversely hit by worldwide recession.

"We did not decide that this is the lowest we could go," he said after the rate cut announcement.

Mr Trichet warned that inflation in the 16-member eurozone could slip to "negative levels" in the coming months, with the recession playing havoc with public finances across the currency bloc. He stressed, however, that the bank saw "a number of drawbacks" with a zero interest rate level and said the ECB was considering a series of "non-standard measures" to help monetary policy underpin growth.

"We do not exclude anything," he said. Non-standard monetary measures, what economists call quantitative easing, can involve printing more money to ease the pressure on banks.

"We are discussing and studying possible new non-standard measures," Mr Trichet said, adding: "I will not elaborate on that. We have absolutely no pre-commitment to any particular non-standard measure".

In an immediete reaction, Bank of Valletta said it won't be adhering to the ECB's latest decision and would keep interest rates higher than those reccomended by the ECB.

BOV said that, on this occasion and for the time being, it was not proposing to make further reductions to either deposit or loans/advances rates.

"The bank is entirely satisfied that interest rates being charged by BOV on loans and advances in Malta are already very competitive by European standards with, for example, home loans being made available from as low as 3.15 per cent. All banks have both sides of their balance sheets to manage and a further reduction in loans/advances rates would necessitate a corresponding reduction in the rates of interest paid on deposits," BOV said. Financial analysts believe the ECB will cut at least another 50 basis points off eurozone rates by the middle of the year, bringing the refinancing rate down to one per cent.

The ECB yesterday also released a series of negative forecasts for the coming two years, saying it expected the eurozone economy to contract by 2.7 per cent in 2009, a significantly gloomier forecast than the Central Bank's previous prediction of a 0.5 per cent shrinkage for this year.

The Central Bank said it expected zero growth in the European single market in 2010, down from its earlier estimate of one per cent growth.