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BLBG: Trichet Says ECB Discussed Rate Cut as Growth Slowed (Update1)
 
By Gabi Thesing and Simone Meier



Oct. 2 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said policy makers discussed cutting interest rates today after the financial-market turmoil weakened economic growth, reducing the threat of inflation.

``The economic outlook is subject to increasing downside risks'' mainly ``stemming from ongoing financial-market tensions,'' Trichet told reporters in Frankfurt today after the bank left its benchmark lending rate at a seven-year high of 4.25 percent. As a result, ``upside risks to price stability have diminished somewhat, but have not disappeared.''

The financial crisis reached new heights in Europe this week as governments stepped in to help rescue five banks and credit costs soared to records. With the euro-region economy on the brink of a recession and retreating oil prices pushing down inflation, the ECB may have more room to lower rates.

Inflation slowed to 3.6 percent in September after crude oil prices retreated 31 percent from a July 11 record of $147.27 a barrel. The ECB aims for a rate just below 2 percent.

``We had examined two options, one letting interest rates unchanged and one decreasing interest rates,'' Trichet said, adding that the decision today was unanimous. Policy makers discussed the ``extraordinary high level'' of economic uncertainty stemming from the financial-market turmoil.

Fallout from the crisis that drove Lehman Brothers Holdings Inc. into bankruptcy on Sept. 15 hit Europe this week, with France, Belgium, Luxembourg and the U.K. rescuing lenders and Italian Prime Minister Silvio Berlusconi pledging to prevent losses for depositors. Banks have recorded almost $600 billion in writedowns and losses tied to the U.S. mortgage market since the start of 2007.

With credit markets freezing as banks refuse to lend to each other, the ECB has boosted lending of euros and dollars. That hasn't stopped money-market rates surging.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.netSimone Meier in Frankfurt at smeier@bloomberg.net

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