Trichet under pressure to outline contingency plans against deflation

Brussels: European Central Bank President Jean-Claude Trichet is under pressure to outline a plan to revive the euro region's economy should he be "trapped" into pushing interest rates closer to zero.

Even as Trichet delivers the largest round of rate cuts in the ECB's history, he hasn't spelled out a specific approach should conventional tools fail to head off deflation.

While he yesterday acknowledged for the first time that unorthodox measures are an option, economists say the lack of detail is a concern.

"The ECB should lean against the wind as deflation talk inevitably becomes widespread," said Marco Annunziata, chief economist at Unicredit MIB in London. "This would be best achieved by taking the deflation risk seriously, and outlining a contingency plan against it."

The absence of a strategy leaves Trichet lagging Federal Reserve Chairman Ben S. Bernanke, who said Dec-ember 1 he may turn to alternative policies such as buying Treasuries after cutting the benchmark rate to 1 per cent.

Deflation dismissed

Bank of England Governor Mervyn King conceded last month that he may have to coordinate policies with the government if UK rates fall to zero.

Trichet instead stresses the need to hold on to as much ammunition as possible before discussing other approaches. At 2.5 per cent, the ECB's main rate is still the highest in the Group of Seven nations even after Thursday's 75 basis point cut.

"We have to beware of being trapped at nominal levels that would be much too low," Trichet told reporters. He dismissed the likelihood of deflation and said buying assets was a possibility, without elaborating further.

"We are looking at the situation as cautiously and attentively as possible."

That is a concern to economists at Royal Bank of Scotland Group Plc and Goldman Sachs Group Inc. who fret that without a road map for recovery, banks may continue to limit loans to consumers and companies.