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Trichet may trim rates in ECB swansong

JEAN-CLAUDE TRICHET'S final weeks as president of the European Central Bank may be among his most contentious.

JEAN-CLAUDE TRICHET'S final weeks as president of the European Central Bank may be among his most contentious.

Mr Trichet is scheduled to hold the last news conference of his eight-year term tonight in Berlin, amid speculation the bank may cut its benchmark interest rate just three months after raising it.

Some analysts doubt the central bank will reverse course so quickly, but say it will need to do something at its monetary policy meeting to respond to deteriorating conditions in the euro zone economy.

Recent events have highlighted the bank's role as the only institution in the euro area with the flexibility and resources to respond quickly to a crisis that seems to grow more acute by the day.

Euro zone governments are struggling to approve a bailout fund in a politically charged process that has focused an improbable amount of international attention on the parliamentary debates in Finland and Slovakia. Yet the fund, at a proposed ?440 billion ($613.6 billion), already appears inadequate for the growing scale of the crisis.

At the same time, fears about European banks seem to be coming true. For instance, Dexia, a Franco-Belgian institution, may break up because of its exposure to Greek debt.

"We are coping with the worst crisis since World War II," Mr Trichet told the Economic and Monetary Affairs Committee of the European Parliament this week.

Analysts at Royal Bank of Scotland see a better-than-even chance the central bank will cut its benchmark rate to 1.25 per cent from 1.5 per cent.

The bank's governing council, which includes the chiefs of the central banks of the 17 members of the European Union that use the euro, is divided and has been sending conflicting signals.

"When I listen to what the governing council members have said in the last few days, there is no consensus," said Michael Schubert, an economist in Frankfurt for Commerzbank.

One argument for cutting rates is that Mr Trichet will want to do a favour for his successor, Mario Draghi, governor of the Bank of Italy.

Mr Draghi, who will take office on November 1, will be under pressure to establish his credentials as an inflation fighter and risks undermining his credibility if he oversees a rate cut upon assuming the presidency.

Inflation hard-liners such as Jens Weidmann, the president of the Bundesbank, are likely to argue against a rate cut even though evidence is building that Europe is going into a recession. Inflation in the euro area probably rose to an annual rate of 3 per cent in September, according to official estimates, above the central bank's target of about 2 per cent.

The central bank may seek a compromise and take less controversial steps to show it is not watching idly as the banking crisis becomes more acute. It could revive its purchase of secured debt issues by banks, or extend low-interest lending to strapped institutions.

None of those moves would solve the debt crisis, though, nor would a large rate cut, for that matter. But the central bank is unlikely to take more radical steps, like printing money to buy huge quantities of government bonds to relieve the banks of damaged assets.

Mr Trichet said political leaders should not expect the central bank to rescue them. "We cannot substitute for governments," he told the parliamentary panel.

As for his own plans, he said he was looking forward to retirement on the coast of Brittany, in France.

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