Trichet Sees `Unusually High Uncertainty' on Growth (Update2)

By Simone Meier and Gabi Thesing

Feb. 7 (Bloomberg) -- European Central Bank President Jean- Claude Trichet signaled that he's open to cutting interest rates for the first time in almost five years, saying there's ``unusually high uncertainty'' about economic growth.

``As the reappraisal of risk in financial markets continues, there remains unusually high uncertainty about its overall impact on the real economy,'' Trichet told reporters in Frankfurt today after the ECB kept its key rate at 4 percent. The euro fell and bonds rose following his remarks.

The ECB kept borrowing costs at a six-year high, declining to follow cuts by counterparts in the U.S. and Great Britain to contain inflation. The Bank of England today lowered its rate a quarter point to 5.25 percent. Trichet's focus on growth today reflected mounting concern that a U.S. slowdown is infecting the outlook for Europe, said Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc.

Trichet's comments were a ``capitulation'' to the view that Europe could resist fallout from the U.S. housing recession, said Cailloux. He moved up his forecast of an ECB cut to April from May, according to a note today. He also assigned a 40 percent chance of a quarter-point reduction next month.

``There is a greater acknowledgment that risks to growth are on the downside,'' said David Owen, chief European economist at Dresdner Kleinwort in London, who predicts a 3.5 percent rate by year end. ``The ECB's not going to cut in next couple of months, but it is starting to prepare the markets for rate reductions.''

Futures Trading

Investors are raising bets the ECB will have to pare its benchmark at least twice this year, according to futures trading. The yield on interest-rate contracts maturing in December fell 10 basis points to 3.42 percent at 3:37 p.m. in Frankfurt. It was as high as 4.36 percent on Dec. 27.

The euro weakened 0.8 percent to $1.4531 from $1.4632 yesterday and the yield on 10-year German bunds fell 5 basis points to 3.85 percent.

The ECB on Dec. 6 projected economic growth of 2 percent this year after 2.6 percent in 2007. Trichet said today that latest data confirmed the bank's assessment that ``risks surrounding the economic outlook lie on the downside.''

The International Monetary Fund on Jan. 29 cut its 2008 euro-region growth estimate by half a point to 1.6 percent, saying that ``no one is going to be exempt from some slowdown.'' The Washington-based fund also trimmed its growth estimates for the U.S. and Japan, the world's two largest economies.

Stock markets have dropped this year on concern the U.S. economy is sliding into a recession, curbing earnings growth. Germany's benchmark DAX Index has lost 16 percent this year and the Dow Jones Stoxx 600 Index 12 percent.

Fed, BOE

The Bank of England today cut interest rates for the second time in three months, and the Fed last month lowered its rate by 1.25 percentage points in two reductions to 3 percent.

The ECB's 21 rate-setting governing council was ``unanimous to decide on maintaining rates at 4 percent,'' and ``there was no call for an increase in rates of a decrease in rates,'' Trichet said today. At the January meeting, the council discussed raising rates.

Trichet today said the bank remained concerned about a potential wage-price spiral.

Inflation in the 15 countries sharing the euro accelerated to 3.2 percent in January. The ECB predicted in December that price gains will average about 2.5 percent this year after 2.1 percent in 2007. That would make 2008 the ninth year the bank failed to achieve its goal of keeping inflation just below 2 percent.

``The ECB sounds more worried by downside risks to growth than in previous months,'' said Dario Perkins, an economist at ABN Amro in London. ``This suggests the tightening bias has gone. But don't assume this means interest-rate cuts are coming soon. The ECB is still constrained by inflation.''

To contact the reporters on this story: Gabi Thesing in Frankfurt gthesing@bloomberg.net ; Simone Meier in Frankfurt at smeier@bloomberg.net .