Trichet Says Credit Crisis May Limit Monetary Policy Leeway
European Central Bank President Jean-Claude Trichet said financial market turmoil may leave central banks with less leeway to decide on interest rates.
“We are clearly concerned about the real impacts of the financial market turmoil, as it impacts also on the policy options of central banks, including monetary policy,'' Trichet said at an economic policy forum at New York University yesterday. “We're in a situation of high uncertainty, where risks are very difficult to quantify.''
The ECB has kept its key rate at 4 percent to fight inflation at a 16-year high, even as the economy of the 15 euro nations loses momentum. The International Monetary Fund on April 9 cut its euro-region growth forecast for this year and said the world economy faces a 25 percent chance of recession.
In the U.S., the Federal Reserve has cut its benchmark rate by 3 percentage points since mid-September, taking it to 2.25 percent, to shore up growth, and the Bank of England on April 10 lowered its key rate for the third time since December, to 5 percent.
Trichet said that the U.S. and Europe are “different'' and the ECB remains focused on fighting inflation, which accelerated to 3.5 percent in March. The Frankfurt-based central bank aims to limit annual gains in consumer prices to just below 2 percent.
Inflation Expectations
Among global central banks, there's “a strong belief that a solid anchoring of inflation expectations is of the essence,'' Trichet said same day payday loans paydayloans. “That's our responsibility as central bankers. I trust we all have that in mind when we act.''
Some ECB council members have already said they don't see any room for the bank to cut borrowing costs from a six-year high. Luxembourg's Yves Mersch said in an interview on April 12 that the ECB can't afford to lower interest rates this year with inflation likely to breach the 2 percent limit in 2009.
Over the weekend, ECB council members attended Group of Seven, IMF and World Bank meetings in Washington that focused on how to combat the global financial turmoil sparked by the U.S. housing slump. Trichet said yesterday that there's no time for “complacency'' about risk.
Banks and securities firms have so far posted about $245 billion in asset writedowns and credit losses in what the IMF describes as the worst financial crisis “since the Great Depression.'' To facilitate lending among banks, the ECB along with the Fed has injected liquidity into money markets.
“No effort is being spared'' across the globe “in tackling the adverse consequences'' of the turmoil, Trichet said. Central banks are “considering a set of possible measures for preventing the present situation from repeating itself in the future.''
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