The European Central Bank kept interest rates on hold at 2% today but signalled it may resume cutting, although zero rates were not 'appropriate' for the euro zone at the moment.
ECB President Jean-Claude Trichet said he did not exclude the chance that the Governing Council would lower borrowing costs rates at its next policy meeting in March, when it will have new data and staff forecasts on the troubled euro zone economy.
The rate freeze halted the most aggressive series of ECB cuts in history, which slashed benchmark credit costs by 2.25% from October's peak of 4.25%.
However, with the economy falling deeper into recession by the week and signs that inflation is heading to worryingly low levels, economists are sure it is just a pause.
Trichet strengthened these expectations. 'We confirm that 2% is not the lowest level,' he told a news conference today. 'I don't exclude that we could decrease rates at our next meeting,' he added.
Many central banks around the world have cut their rates close to zero, but Trichet played down the chance that the ECB would follow suit. 'Zero interest rates at this moment is not something we could consider appropriate,' he said.
The US Federal Reserve, the Swiss National Bank and the Bank of Japan have already reduced credit costs below 1%. The Bank of England cut UK rates to 1% earlier today.
The decision today had been widely expected, as Trichet virtually ruled out a cut after the last rates meeting when he said the next important 'rendezvous' for monetary policy would be in March.
Most economists expect the ECB to resume the easing cycle next month with another half a percentage point cut.
Euro zone inflation risks diminishing
Mr Trichet also said today inflation risks are diminishing and should remain in line with the ECB's target. The euro zone and its big trading partners were undergoing an extended period of significant economic downturn, he noted.
Inflation in the 16-country bloc eased to 1.1% in January, the lowest in almost 10 years and well under the ECB's target of below, but close to 2%.
The European Central Bank president also said today that he saw signs of protectionism in government responses to the global economic crisis.
'Protectionism is something which is considered by the (ECB) governing council as a very very important threat,' Trichet said.
'We see tendencies to embark on trade protectionism, and that is something which is exactly the contrary of what should be done in the present circumstances, and we know that,' he stressed.
Several major economies have suggested they might favour domestic industries and workers as they seek to stimulate recession-hit economies.
