April 17, 2009 / 9:12 AM / 10 years ago

Trichet sees need for balance

TOKYO (Reuters) - European Central Bank President Jean-Claude Trichet said on Friday banks would be the focus of any unconventional policy response to the financial crisis, and that the ECB needed a strategy to eventually reverse those measures.

Trichet, who is due to unveil the ECB’s plans for further unconventional policy steps next month, gave no details of these measures, saying he did not want to create expectations. In the United States, Britain and Japan, central bank responses have involved purchases of bank and government debt.

Trichet also said he appreciated U.S. policymakers saying a strong dollar is in U.S. interests, adding it did not fit with reality to say the euro is weak now as the single European currency is stronger than at its launch a decade ago.

The euro fell to its lowest in a month after his comments to $1.3065 on trading platform EBS.

“Though Trichet’s comments today provided few surprises, he also seemed to suggest that he does not want to cut rates further after May,” said Takahide Nagasaki, chief FX strategist at Daiwa Securities SMBC.

“Such a stance may not work in the euro’s favour as it casts doubts on the euro zone’s economic recovery prospects.”

The ECB has cut its benchmark rate by 3 percentage points since October and is expected to cut its headline refinancing rate by another 25 basis points to 1.0 percent in May as the euro zone struggles in its worst recession since the currency was created.

It has so far resisted large scale asset buying as a way to pump money into the economy, unlike the U.S. Federal Reserve, the Bank of England and the Bank of Japan, but it plans to announce “non-standard” measures at its next policy meeting on May 7.

Trichet offered little insight into what the ECB would do, but said it would keep in mind the dominant role that banks played in ensuring access to credit.

“At this stage, as a porte-parole of the Governing Council, I think it is important not to create or encourage expectations,” Trichet said.

“Be sure that what we will decide will fully take into account the financing structure of the euro area economy and will be fully in line with our medium term strategy.”

He said the ECB must balance the need for action with the need for a plan on how to exit such policies in future.

“Confidence today relies equally upon the audacity of our immediate decisions and upon the soundness and credibility of our exit strategies,” Trichet said in a speech in Tokyo.

RECESSION BLUES

With the global economy in its worst downturn in recent history, inflation is slowing globally but some investors are worried that huge cash injections by the world’s central banks could spark inflation in the future.

Despite the downward economic spiral, the ECB has repeatedly ruled out cutting rates to zero, and has kept rates noticeably higher than many of its peers, including the U.S. Federal Reserve, the Bank of Japan and the Bank of England.

The euro zone economy contracted 1.6 percent in the last quarter of last year, and the first quarter of this year is expected to be dismal as well.

Euro zone industrial output plummeted by a record 18.4 percent in February from a year earlier and inflation halved to an all-time low in March, underlining the depth of recession and adding to pressure for ECB policy easing.

Euro zone annual inflation slowed to 0.6 percent in March, the lowest rate since records going back to 1996, with prices already falling year-on-year in Ireland, Portugal, Luxembourg and Spain.

But Trichet said long-term inflation expectations in the euro zone were still at a level consistent with price stability.

ECB Governing Council member Nout Wellink said late on Thursday the euro zone economy performed worse in the first quarter than expected, but added that the negative trend was starting to level off.

“The deterioration in the first quarter was stronger than some had expected, but that is starting to level off,” Wellink said on the sidelines of a lecture at the Amsterdam University.

Wellink, who also heads the Dutch Central Bank, said he was not worried at the moment about a higher risk of deflation in the euro zone.

“We know that we will have months of negative price developments in Europe. That is not necessarily a reason to worry as this raises available income. It would be a reason to worry if this leads to postponement of spending by investors and consumers,” Wellink said.

Additional reporting by Satomi Noguchi and Rika Otsuka in Tokyo and Harro ten Wolde in Amsterdam

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