European Central Bank president Jean-Claude Trichet said today that the ECB governing council had discussed a possible cut in interest rates.
'We examined two options,' Trichet told a press conference in Frankfurt after the bank left its main lending rate unchanged at 4.25%.
He said the options were allowing euro zone interest rates remain unchanged, while the other option was cutting interest rates. His comments sent the euro to a 13-month low against the dollar.
Asked about Ireland's bank guarantee scheme, he said only that the Government had made 'a very hard decision' in exceptional circumstances.
Trichet said ECB policymakers recognised 'the extraordinary high level of uncertainty stemming from latest developments' on turbulent financial markets and the credit crunch.
He said economic activity in the euro area was weakening with shrinking domestic demand and tighter financing conditions.
Analysts had expected the ECB to keep rates at a seven-year high for the third month in a row today, due to its concerns about inflation.
Trichet told reporters that annual inflation rates were likely to remain well above its target level of 2% for some time. He added that although weaker demand meant inflation risks had diminished they had not disappeared.
Euro zone unemployment is rising unexpectedly and manufacturing activity is at its weakest since just after the September 11 2001 attacks on the US. Most analysts expect the problems to pave the way for a rate cut early next year, especially as inflation recently fell to 3.6%, though it remains well above the ECB's 2% threshold.
Meanwhile, the single European currency fell to $1.3748, its lowest level since September 7 2007, from $1.4009 late on Wednesday in New York. The euro hit a record high of $1.6038 in July.
Dealers said Trichet's comment was enough to spark intense speculation that the ECB was getting closer to a rate cut.
The euro later stood at $1.3834 this evening, while it was also worth 78.44 pence sterling.
