ECB Considering Further Easing In May: Trichet

TOKYO (Nikkei)--The European Central Bank is considering additional monetary easing measures to stabilized Europe's financial system and shore up the battered economy, President Jean-Claude Trichet told The Nikkei in a recent interview.

In addition to a "measured" rate cut, the ECB is contemplating "nonstandard measures," whose details will be explained at the Governing Council meeting on May 7, Trichet said. Purchasing corporate bonds and extending fund provision periods are believed to be among the proposals under consideration.

Excerpts from the interview follow.

Q: You said a rate cut is not excluded. What would be the extent of a rate cut?

A: I said it will be very measured, very measured. Let me say that I am only repeating what I already said in the press conference after the last Governing Council. In the last Governing Council, I said: "We are today decreasing rates by 25 basis points." And I added for the main policy rate: "I don't exclude that we may decrease it by a very measured pace again." I added that 25 basis points was for me a measured pace. And I also added that I did not see the deposit rate being changed in the period to come.

Q: Could you explain why do you want to avoid lowering interest rates to zero?

A: It's the position of the Governing Council. We have many good reasons.

Q: Why are nonstandard measures necessary?

A: We have decided already to embark on nonstandard measures to cope with the situation since mid-September 2008. In our case, the nonstandard measures that we have already taken are the following: We have an unlimited supply of liquidity at fixed rates, not only in our main refinancing operations of one week, but also for one month, three months and six months. We have also new collateral framework that has been significantly enlarged. As regards to possible new nonstandard measures, we will have our next meeting on 7 May. That day, I will explain in detail what we will have decided.

Q: In the last press conference, you said that the economy will be very weak over the year 2009 before starting a gradual recovery in 2010. Yesterday, you repeated that assessment. What is the basis for your assessment?

A: First of all, the observations that I made at the ECB as well as all the projections that we see by international public institutions, and also the private sector, confirm that 2009 will be a very difficult year. I think there is wide consensus on that. 2010 could be the year of a progressive recovery. But it depends very much on what we will do to increase confidence, it is the main problem that we have today, since the start of the current episode in 2007 and particularly since the intensification of the financial crisis which took place in the middle of September 2008. At that time, we have seen a very abrupt and sharp elimination of confidence, both in the constituency of the household and also in the corporate sector. And not only in the financial sector, but also in the nonfinancial corporations. So, our main goal, I would say that the main goal of the private and the public sector, the central banks as well as government and authorities in the public sector, should be to reinforce, preserve, foster, augment confidence. Confidence is the ingredient which is lacking the most in the global economy currently. To improve confidence, you have to be bold to cope with the immediate difficulties. And you have at the same time to be absolutely clear on your medium-, long-term strategy, what I would call the exit strategy, and demonstrate it to the fellow citizens and to the corporate sector. That means you will have to be credible in your path to get back to a normal situation in the medium term. This is of the essence.

Q: Why is it necessary to have a sustainable fiscal policy?

A: It is necessary everywhere in the world, but every country is in a specific situation. I would say that all countries have several constraints. One is financial constraints. If you are obviously doing things that markets would consider not reasonable, then you will pay a higher price, not only for the financing of the additional deficit, but also for the refinancing of the stock of debt. But perhaps the most important thing is the confidence channel. You are not better off if people feel that you do not have a good exit strategy and that what is decided today, will very much hamper the future of their children and even their grandchildren. Instead of purchasing or investing, they might save more. So you will have no impact of your own fiscal policy and additional stimulus. It is one of the reasons why the central banks all over the world have said: Let's be cautious and prudent.

Q: Some European countries, especially Eastern European nations, are facing a serious financial crisis. Should the euro zone step in to help these countries?

A: It is an important point, since we are closely linked by trade. The responsibility of each of us is to make sure that your own economy is doing well. Coming to the euro area, we are the main partner for all Eastern and Central European countries. We are all interdependent. That being said, it is not good to talk about Eastern and Central Europe as one bloc. You have big differences between these countries. Some are showing resilience in difficult circumstances and a better structure of their economy, and perhaps also better policies over time. These countries don't like being treated as one bloc with others, because they are not the same. On the other hand, for the countries in difficulties, stimulus packages were organized with the help of the European Union. And the IMF as well as the World Bank also contributed. The ECB itself has bilateral relations with the central banks of these countries.

Q: Are you planning any cooperation with the Federal Reserve Board and the Bank of Japan to fight the global recession?

A: We have very close relations with the fellow governors of these central banks. We have taken very important decisions which were stressed by communiques published simultaneously in Europe, Japan and the U.S. We have very intense cooperation with the Federal Reserve. We are supplying dollar liquidity on behalf of the Fed in Europe. There is a reciprocal arrangement, which also allows euro liquidity to be provided in the U.S. So, we are in a mood of intense and very confident cooperation. I think this is also the mark of the times that the various central banks all over the world have been very effective in coping with this exceptional situation. And I have a very confident relationship myself with Masaaki Shirakawa. We are meeting very often on, for example, the G-7, G-10 and G-20 summits, and it is very important to have this relationship as close as possible.

(The Nikkei April 20 morning edition)