MercoPress. South Atlantic News Agency

Euro zone rate lowered to 1.25% and possibly to 1% in May

The European Central Bank said Thursday it would lower its key lending rate a quarter of a percentage point to 1.25%, effective April 8. It is the sixth time the ECB has lowered its key rate since October 2008, when it stood at 4.25%, as it tries to boost economic activity.

The reduction “takes into account the expectation that price pressures will remain subdued,” bank President Jean Claude Trichet said in a statement in Frankfurt, Germany.

“The world economy, including the Euro area, is undergoing a severe downturn,” he said, noting, “both global and Euro area demand are likely to remain very weak over 2009, before gradually recovering in the course of 2010”.

Mr. Trichet said the decision was taken by ”consensus“ -- meaning that not all the governing council members supported the move. But the rate may go lower than 1.25%, he added.

“Is this the limit? I would say very candidly, it is not the lowest limit as I don't exclude that we could, in a very measured way, go down from the present level”.

He added the ECB governing council could also announce more unorthodox measures to boost the economy that many term quantitative easing.

”It is the intention of the (ECB) Governing Council to decide on further non-standard measures ... It is our intention to decide at the next meeting“ on May 7, Trichet said.

The ECB president pointed again to the bank's previous decision to provide commercial banks with unlimited amounts of cash at fixed interest rates as a prime example of ”non-standard measures“.

The Euro shot higher on the decision, rising as high as 1.3489 from 1.3233 on Wednesday. Crude-oil futures also rallied.

Stocks in Europe held the line on the strong gains made ahead of the decision.

The ECB, which sets interest rates in the 16 countries that use the Euro as their currency, was confronted with recent data showing rising unemployment, slumping industrial orders and limp retail spending. The Euro zone has been officially in recession since last November.

In addition, inflation was estimated to be just 0.6% in March -- well below the ”nearly 2%” that the ECB targets.

Trichet said inflation may turn briefly negative before rising in 2010, when it's expected to remain below 2%.

ECB has said that it expects GDP in the 16-nation bloc to shrink between 2.2% and 3.2% this year. But the Organisation for Economic Cooperation and Development (OECD) predicted this week that the Euro zone economy would contract by 4.1% and also warned that unemployment rate could rise to almost 12% in 2010.