(Reuters) – The European Central Bank signalled on Thursday that it had halted a cycle of interest rate rises begun just five months ago, saying euro zone inflation risks were no longer skewed to the upside and economic growth would be slow at best.
ECB President Trichet said there were “intensified downside risks” to the economic outlook for the 17-country euro zone, marking a significant change in stance from last month when the bank was focused on inflation risks.
“The change in tone firmly shelves rate hikes and even opens the door to rate cuts if the economic outlook deteriorates further,” said ABN Amro economist Nick Kounis.
Trichet said inflation should fall below 2 percent in 2012 from 2.5 percent last month, and that price risks were “broadly balanced”. That assessment marked a change from last month, when he said there were “upside risks to price stability”.
“We expect the euro area economy to grow moderately, subject to particularly high uncertainty and intensified downside risks,” Trichet told a news conference after the ECB left rates at 1.5 percent, following hikes in April and July.
“We are in a situation which is exceptionally demanding,” Trichet said, making an impassioned defence of the ECB’s record and its handling of the euro zone debt crisis when asked about calls from some in Germany for a return to the Deutschmark.
The ECB had delivered price stability “impeccably”, he said, holding his last monthly news conference at the ECB’s Frankfurt news conference before his term expires at the end of October. Next month, the ECB Governing Council meets in Berlin.
“I would like very much to hear the congratulations for an institution which has delivered price stability in Germany over almost 13 years at 1.55 percent approximately … which is better than what has ever been obtained in this country over the last 50 years,” he said, raising his voice and visibly moved.