The Wall Street Journal-20080124-Credit Crunch- ECB to Focus on Inflation Fight- Dimming Rate-Cut Hopes
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Credit Crunch: ECB to Focus on Inflation Fight, Dimming Rate-Cut Hopes
European Central Bank President Jean-Claude Trichet gave no sign that the bank is preparing to cut interest rates in the euro zone, as central banks around the globe considered how to respond to Tuesday's surprise rate cut by the Federal Reserve.
Speaking to the European Parliament in Brussels, Mr. Trichet acknowledged risks of slowing growth but indicated that the ECB wasn't ready to shift from its anti-inflation stance. "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 in already highly volatile markets," Mr. Trichet said.
Financial markets have come to expect the ECB to cut interest rates, possibly as early as May. But Mr. Trichet spoke more about containing inflation than sustaining growth. The ECB wants to keep inflation just below 2% over the medium term, but the annual rate was 3.1% in November and December.
Economists believe that the ECB will eventually respond to signs of a significant loss of momentum in the euro-zone economy, although they disagree on when the central bank will first cut rates.
Yesterday, despite inflation estimated to be as high as 10% in some Gulf Cooperation Council states, Arab oil producers, including Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Bahrain followed the Fed and lowered official interest rates to keep their currencies aligned with the dollar, while raising banks' reserve requirements to rein in liquidity. Omani central bankers said a move was expected in the coming week.
Bank of England Gov. Mervyn King earlier this week indicated British rates may come down in February but that any cuts will be far more gradual than those made by the Fed. Minutes from January's Bank of England meeting, released yesterday, showed the bank's policy committee voted 8-1 to hold interest rates unchanged. The lone dissent was perennial dove David Blanchflower, who called for a further quarter-point cut.
Separately, Norway's central bank left key interest rate unchanged at 5.25%, underlining the continued strength of the country's economy.
There was no immediate response from central banks in Asia. If the Fed's emergency cut -- and an expected further cut next week -- soothes markets and bolsters U.S. demand, Asian central banks may be able to refocus on inflation-busting as their export-reliant economies maintain their vigor.
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Oliver Klaus and Mirna Sleiman contributed to this article.
