European Central Bank President Jean-Claude Trichet said he can't rule out further interest-rate cuts after joining a round of global reductions today and offering to flood the banking system with as much cash as it needs.So Much For Price Stability Mandates
The Frankfurt-based ECB lowered its key lending rate by half a point to 3.75 percent and said it will start lending banks unlimited cash in its weekly auctions at the new benchmark. Asked if the rate cut was a one-off, Trichet replied: "I don't say that. I say that we will always do whatever is necessary."
By deciding to lend banks as much cash as they want at the benchmark rate, rather than at a rate determined by demand, the ECB "is now really deploying its strongest weapon to bring money- market rates down," said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. "This brings them closer to becoming a European clearing house."
The ECB also narrowed the corridor around its key rate to 100 basis points from 200 points. That means it reduced the cost of emergency overnight cash to 4.25 percent from 4.75 percent and raised the rate it pays banks for overnight deposits to 3.25 percent from 2.75 percent.
"The decision just made by the ECB to open liquidity, to tell banks `if you need financing, come refinance yourself here, you can do it at fixed rates without limit,' is the sort of decision that may unfreeze the system," French Finance Minister Christine Lagarde said on France 2 television.
"It was appropriate to give a very powerful signal of confidence and of intimate cooperation," Trichet said of today's the coordinated response to the crisis.
What was it someone was telling me just two weeks ago? Oh, here it is: "Trichet will NEVER cut. The ECB has price stability mandates."
The person went out of his way to put "NEVER" in caps.
That's rather touching given that today the ECB made a 50 basis point in conjunction with global coordinated panic (see Global Coordinated Rate Cuts Won't Solve Economic Crisis).
Looks like they're all Keynesians now.
That style of punchline is getting a bit stale, but I just couldn't resist.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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