European bank cuts key rate to record 1.25%, could go lower

The European Central Bank could further reduce its record-low interest rates, President Jean-Claude Trichet told reporters Thursday, after the bank cut its benchmark figure a quarter of a percentage point to 1.25%.

Trichet said that the decision by the governing council to reduce the rate was made by consensus and added that the rate could go lower.

"Is it the lower limit? I would say, very candidly, in regard to the main policy rate (that) it's not the lowest yet," Trichet said. "I don't exclude we could, in a very measured way, go down from the present level."

The rate is at its lowest point since the bank was founded and since the euro was adopted 10 years ago. Trichet said that, to his understanding, they are also at their lowest point since World War II.

As for alternative measures to stimulate economic activity — such as buying assets from banks to boost the availability of money — he said the bank would examine them, but did not break down what those may be or what they could entail.

"We will see what we decide," he said.

After a half percentage point rate cut at the last rate-setting meeting March 5, Trichet had indicated that another reduction was possible and that the bank was looking at new measures to breathe life into the ailing euro zone economy, which accounts for more than 15% of the world's gross domestic product.

The U.S. Fed and the Bank of England have taken their benchmark interest rates just about as low as they will go — in the U.S, the Fed funds rate is down in a range between zero and 0.25% while in Britain the key rate has fallen to 0.5% — and have embarked on a policy of expanding the money supply in the economy by buying securities from banks.

But the European Central Bank faces difficulties with this so-called quantitative easing that other central banks don't have. Though the bank could, in theory, buy government bonds in the secondary market, it faces operational difficulties in how it would allocate that across the 16 member countries.

The ECB has been criticized in many quarters for not cutting interest rates as fast as the U.S. Federal Reserve and the Bank of England, even though inflation is well below the "close to but below" 2% target and the economies in the euro zone are contracting sharply. Lower rates can spur growth but risk boosting inflation.

High-value exports have been hit particularly hard by the global downturn, with industrial orders across the euro zone down a staggering 58% in the three months to January compared with the same period the year before.

Keeping interest rates higher than in the U.S. or Britain has contributed to a rise in the value of the euro over recent weeks. That doesn't help euro zone's exporters and will likely provide the governing council even more incentive to cut borrowing costs again.

A higher euro makes it more difficult for exporters to sell their products abroad while making imports cheaper and further diminishing inflationary pressures.