OUTGOING EUROPEAN Central Bank chief Jean-Claude Trichet warned of “intensified downside risks” to the euro zone’s slowing recovery as the bank’s policy-makers put a new cycle of interest rate increases on hold.
The warning from Mr Trichet, who retires next month, helped send German bonds to a record low as investors weighed a new threat to the battle to contain the sovereign debt crisis.
“We expect the euro area economy to grow moderately, subject to particularly high uncertainty and intensified downside risks,” Mr Trichet told reporters in Frankfurt.
“The change is that today we see that there is a downside risk to growth on the basis of the present analysis, which is of course a change which is significant.”
As the euro zone debt crisis worsens, Mr Trichet repeated his plea to euro zone leaders to enact agreed reforms to their bailout fund. They have agreed to give the European Financial Stability Facility powers to intervene in secondary bond markets but markets are concerned about backsliding on the plan.
Having pressed the Italian government to embark on a new austerity plan, he urged Greece to follow through with reforms promised under its bailout programme and said the bank’s bond buying programme and emergency support for banks remained “temporary” in nature.
Mr Trichet indicated that he sees no reason to drop his resistance to moves by Minister for Finance Michael Noonan to impose big losses on senior bonds in Anglo Irish Bank. However, he said it was clear that Ireland’s credit-worthiness was improving under the bailout programme.
Asked about political claims in Germany that the country should go back to the deutschemark, he made an impassioned defence of the ECB’s record and said the bank should be congratulated for its role in maintaining German price stability for longer than in any other period since the second World War. His voice rising, he said the bank’s record was “impeccable” and it had fulfilled its mandate in very difficult circumstances.
He also attacked France, Germany and Italy for seeking in 2004 and 2005 to water down the EU’s stability pact, which is supposed to keep the public finances of euro zone countries in check by imposing strict conditions.
Mr Trichet said inflation should fall below 2 per cent in 2012 from 2.5 per cent last month, and that price risks were “broadly balanced”. The bank’s policy is to keep inflation below but close 2 per cent. His latest assessment was in contrast to the conclusion last month when he said there were “upside risks” to price stability.
The bank’s governing council held its main interest steady at 1.5 per cent after two increases this year, most recently in July.
Analysts quickly concluded that any further rise is unlikely for the moment and some are predicting that rates might be cut as early as December if the new threat to the recovery materialises.
