Eurozone interest rates fell by half a percentage point to the lowest level in more than three years on Thursday as the European Central Bank said it expected the single currency area’s recession to deepen and signalled borrowing costs could fall further.
Morning Call: January 16

In a sign of the extent to which eurozone policymakers have been taken aback by the ferocity of the downturn, Jean-Claude Trichet, ECB president, warned growth forecasts it published only last month would have to be revised downwards.

Even after the bank cut its main policy interest rate from 2.5 per cent to 2 per cent – marking a return to the record low level last seen in 2005 – official borrowing costs had not reached a floor, Mr Trichet said. Pointedly, he did not rule out resorting to the use of tools other than interest rates to stimulate that economy, such as government bond purchases.

However, Mr Trichet all but excluded a cut at the ECB’s February meeting, just three weeks away, saying further bad economic news had been factored in already and the next “important” policy meeting would be in March. The ECB president also reiterated the bank’s fear of cutting interest rates too far and falling into a dangerous “liquidity trap,” in which investors and consumers simply hoard money.

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