Eurozone interest rates could soon be cut for the first time in five years, the European Central Bank signalled yesterday after acknowledging that global financial turmoil had changed substantially the economic outlook for the 15-country region.
Jean-Claude Trichet, ECB president, opened the door for a possible cut in official borrowing costs in November – or earlier if the financial market crisis escalates – by saying that although eurozone inflation risks had not disappeared, they had fallen. His comments amounted to a significant change of tone at the Frankfurt-based institution, which raised interest rates only in July to head-off inflation dangers. Mr Trichet hinted at European policymakers' alarm at developments in the US, saying that allowing Lehman Brothers to collapse had had “enormous . . . very unfortunate consequences”.
The ECB governing council had discussed cutting interest rates yesterday before deciding “unanimously” to hold them steady at 4.25 per cent, he revealed. The newly doveish tone contributed to a sharp slide in the euro, which fell to $1.37 – a one-year low against the dollar – and Y145.50. It also came on a day of continued market nerves, caused not least by new figures showing the continued contraction of the commercial paper market.