The European Central Bank, which last year was so reluctant to cut interest rates, has delivered yet another one, to an historic low of 1.25 percent in a bid to spur growth and fight falling inflation and a deepening recession. The 25 basis points reduction in the key refinancing rate was less than the half-percentage-point analysts had expected, but ECB chief Jean-Claude Trichet did not rule out a further cut in the future. “As regard the main policy rate it is not the lowest limit.

 I don’t exclude that in a very measured way we can go down from the present level,” Trichet told a news conference after a meeting of the ECB’s 22-member rate-setting council. The reduction was the sixth since October, 2008. During that time the bank has lowered its key rate in the 16- member Eurozone by three percentage points, reflecting its effort to kick start economic growth. The latest cut coincided with the Group of 20 summit of leading economic powers in London, which is aimed at bolstering global economic confidence and revamping world financial rules.

Along with the refinancing rate, the Frankfurtbased ECB trimmed by 25 basis points its deposit rate, which it pays on cash held at the central bank overnight. This brought the deposit rate down to 0.25 percent, after the bank cut the facility last month to 0.5 per cent. Trichet said he did not expect the deposit rate to be lowered in the near future. The ECB chief said the rate cut decision was taken in view of an easing of price pressures and projections that headline inflation will decrease in the months ahead. Data released ahead of the ECB meeting showed annual inflation in the Eurozone slowing to 0.6 in March, its lowest level since the introduction of the common European currency a decade ago.

This leaves inflation well within the ECB’s preferred spread of “below but close to two percent.” Trichet said, “After today’s decision we expect price stability to be maintained in the medium term.” Having effectively rejected the ECB moving to a zero interest rate regime, Trichet indicated that the bank has been considering unconventional measures. This could possibly include implementing a so-called quantitative easing policy, which is effectively printing money. Trichet declined to be drawn on which measures where under consideration but hinted that details could emerge at the next meeting of the rate-setting council at the beginning of May. He said changes in exchange rates was not one of the measures under discussion.

Many analysts, however, believe it could still take a while before the ECB follows the world’s other leading central banks - the US Federal Reserve, the Bank of Japan and the Bank of England - and takes steps to boost the money supply. The scale of the economic downturn has meant central banks around the world believe they can no longer rely solely on interest rates and have been forced to revert to unconventional measures to combat the global recession.

CLOSELY WATCHED SIGNS
Adding to the belief that another ECB rate cut was likely, the European Commission said its closely watched economic sentiment indicator for the Eurozone fell from 65.3 in February to hit 64.6 in March, its lowest level since the survey began in 1985.

“The weaker-than-expected economic sentiment data for March will pile further pressure on the ECB to cut its main interest rate by 50 basis points later this week,” ING economist Martin van Vliet told Deutsche-Presse-Agentur (dpa.) Going forward, however, economists are divided on whether borrowing costs at one percent will bring the ECB’s current rate-cutting cycle to an end or if the bank will continue easing monetary policy. Amid evidence that the recession has deepened, Jennifer McKeown, European economist with the research group Capital Economics said she believes the ECBwill trim its benchmark refinancing rate to 0.5 percent in the coming months.

But the scale of the downturn has meant that central banks around the world believe they can no longer rely solely on interest rates and have been forced to revert to so-called unconventional measures to combat the global recession. Having effectively rejected the ECB moving to a zero interest rate regime, Trichet has indicated that the Frankfurt- based ECB has been considering unconventional measures. This could possibly include implementing a so-called quantitative easing policy, which is effectively printing money.

Preliminary data showed annual inflation in the Eurozone sliding to 0.9 percent in March from 1.2 percent as falling energy costs, declining food prices and the dramatic contraction in economic growth have undercut price pressures. This will also leave inflation well within the ECB’s inflation target of “below but close to two percent.” At the same time, however, the sharp fall in inflation has helped to raise the spectre of deflation taking hold in the Eurozone economy.

TROUBLE ACROSS THE BOARD
Indeed, Germany’s statistics office said annual inflation in Europe’s biggest economy fell to 0.5 percent in March, its lowest level in nearly 10 years. Meanwhile, the bleak economic data has continued to roll in, as a consequence pointing to the recession gaining strength as the new year got underway and raising the prospects of a major contraction in the Eurozone bloc’s first-quarter economic growth rate. The International Monetary Fund already expects the Eurozone economy to shrink by 3.2 percent this year.

Eurozone factory orders chalked up their biggest fall on record in January, tumbling 34.1 percent year on year, the European Union’s statistics office said as global demand has plunged and European companies have cut production and begun laying off workers. The release of the figures followed the publication of statistics earlier in the week showing industrial production plummeting by 17.3 per cent in January. Also underscoring the depth of the slowdown, German business confidence hit near a 26-year low in March and the nation’s exports falling by a massive 20.7 percent year-on-year in January.

Germany is the world’s leading export nation. The Spanish economy will shrink three percent this year, the Bank of Spain predicted. Unemployment will climb from about 14 percent - already the highest in the European Union - to 17 percent this year and 19.4 percent in 2010, the central bank said. The government had earlier forecast that the economy would shrink 1.6 percent in 2009, its first contraction in 16 years, and start growing again next year. The central bank, however, said gross domestic product (GDP) would still shrink by one percent in 2010 and begin to grow only towards the end of the year.

The Spanish economy, which has been hit by the collapse of the country’s housing sector and the international crisis, went into a recession late last year. Denmark’s central bank lowered its lending rate by 0.25 percentage points to two percent, citing an earlier move by the ECB. The Danish central bank said the discount rate and the current account rate would also be lowered by 25 basis points to 1.75 percent. Denmark is a member of the European Union, but not a member of the Eurozone.

GOING FOR GOLD
In yet another sign of the desperate time, the ECB said it sold 35.5 tonnes of gold up to end of March. At a price of around USD 28,600 dollars per kilo, the sale fetched an estimated USD one billion. The ECB said the sale was in full conformity with a 2004 agreement among central banks restricting their annual sales of gold. Central bank gold stocks are part of their currency reserves. In the 2004 agreement, the ECB, Eurozone central banks and those of Switzerland and Sweden agreed to limit their combined annual gold sales to 500 tonnes for a period of five years.

There has been growing interest in purchasing gold as a hedge against inflation and as more customers fear keeping their money in banks on the verge of collapse. In Sweden, the government prolonged its guarantee programme for bank lending, in an attempt to free up more credit. “Even if the financial markets are functioning better, the global financial crisis and its ramifications for jobs and companies in Sweden is far from over,” Financial Markets Minister Mats Odell told reporters. Under the programme, the government is prepared to lend money to banks that are having difficulty getting credit from private sources.

The banks, in turn, lend this money on to others. So far, only one of the four major Swedish banking groups, Swedbank, has signed on to the programme. The government said the guarantee programme had contributed to lower lending rates, saying the commercial banks had shadowed the central bank’s interest rate cuts. The programme, extended to October 31, is authorised to loan up to USD 150 billions. The Financial Supervisory Authority said the other Swedish banks had managed to secure capital from shareholders. “That is quite unusual in Europe,” the authority’s Director General Martin Andersson told Swedish radio news. The authority said Swedish banking groups have a good level of capitalisation.

THE BALTIC PUSSYCATS
The economic gloom afflicting the Baltic states got several shades darker with a fresh forecasts revising expectations downwards. Until mid-2007 the so-called Baltic Tigers of Estonia, Lithuania and Latvia recorded Europe’s fastest growth rates, but their economies have stalled spectacularly in the wake of the global downturn. According to a spring forecast from the Estonian Ministry of Finance, the economy in the smallest of the Baltic states will contract by 8.5 percent in 2009. “Estonia is undoubtedly at a difficult time.

At the same time this gives us a real opportunity to use the downturn to create a more efficient and more stable economy,” said Estonian Finance Minister Ivari Padar. An even bigger hit is likely to be suffered by neighbouring Latvia, according to Economics Ministry official Olegs Baranovs. Briefing the cabinet of Prime Minister Valdis Dombrovskis, Baranovs said Latvian GDP would probably contract by more than the official 12 percent forecast, reported the Baltic News Service.

According to a fresh report produced by the Economics and Finance ministries, Latvia’s unemployment rate could hit 16 percent by the end of the year. “It is possible that, as a result of the global financial crisis, the decline in external demand will be much steeper than currently estimated ... Further dramatic cuts in lending and public expenditure would result in a sharp decline in investment and private consumption,” the report said. The new figures will add weight to Latvia’s current attempts to renegotiate the terms of a 10-billion- dollar economic assistance package brokered by the IMF.

According to the current agreement, Latvia’s budget deficit must not exceed five percent of GDP, but Dombrovskis is arguing that the worsening economic outlook makes such a target impossible and is asking for a seven percent cap instead. Lithuanian Finance Minister Algirdas Semeta revealed he expects a 10.5 per cent contraction in the largest of the Baltic economies this year. “The bigger-than-predicted GDP decline will inevitably affect budget revenues,” Semeta said. “So the government in completing the preparation of budget amendments designed to significantly reduce costs while ensuring the country’s macroeconomic stability.”