The European Central Banks has said that inflation risks in the euro zone have diminished and economic activity is weakening.
Financial markets took that as a signal of possible future interest rate cuts. But for the moment the cost of borrowing stays unchanged. The ECB’s benchmark rate remains at 4.25%.
After announcing that, bank president Jean Claude Trichet’s comments were downbeat: “In the view of the governing council, the economic outlook is subject to increased downside risks, mainly stemming from a scenario of ongoing financial market tensions affecting the real economy more adversely than currently foreseen.”
Asked if there should be a pan-European approach to the banking crisis, Trichet said Europe is different from the US and their approach would not work here: “I would confirm that we in Europe are in a framework which is not a political federation, we do not have a federal budget and so the idea that we could do the same as what is being done on the other side of the Atlantic doesn’t fit with the political structure of Europe.”
Commenting on the instability in global financial markets, Trichet said the current situation had never been encountered before and the turbulence creates a high level of uncertainty.