Luxembourg - The European Central Bank left interest rates
on hold at a record low Thursday with ECB chief Jean-Claude Trichet
indicating that the bank was in no rush to change borrowing costs as
it sizes up the success of new mechanisms in combating the global
recession.
Meeting in Luxembourg at one of twice-yearly out-of-town sessions,
the Frankfurt-based ECB's decision to leave rates at one per cent in
the 16-member eurozone unchanged for the second consecutive month was
in line with analysts forecasts.
Speaking at a press conference following the meeting of the ECB's
22-head governing council, Trichet said inflationary pressures were
low and warned about the threat of escalating unemployment.
Many analysts believe that borrowing costs in the currency bloc
could be on hold well into 2010 as growth in the eurozone economy
struggles to gain traction following the world's biggest economic
crisis in more than six decades.
'The ECB has now...switched to cruise control,' said ING Bank
economist Carsten Brzeski. 'Only a sudden deterioration of the growth
and inflation outlook would force the ECB to step on it again.'
At his press conference, Trichet would also not be drawn on future
liquidity operations follow the ECB's bold move last week to inject a
massive 442 billion euros (620.3 billion dollars) of funds into the
financial system aimed at encouraging bank lending in the face of
subdued credit growth.
'We were happy with the results of this liquidity supply,' said
Trichet, adding that the ECB was observing the impact of the
operation.
But he went on to say: 'As regards the other (future) auctions,
we will see when time comes what is the position we will take. We
took no decision yet.'
The one-year allotment followed the ECB's announcement a month ago
of plans to help spur economic growth by buying up to 60 billion
euros (84 billion dollars) of covered bonds.
The covered-bond program to be launched on July 6 formed part
of what Trichet described as the bank's program of 'enhanced credit
support.'
Trichet insisted Thursday that the ECB did not believe that a
benchmark rate of one per cent was the lowest level the bank was
prepared to go.
But analysts do not believe that the ECB bank will follow the
world's other leading central banks, including the US Federal Reserve
and the Bank of Tokyo, and trimming interest rates to near zero.
Thursday's ECB announcement on rates came following the release of
data ahead of the meeting showing eurozone unemployment climbing and
inflation tumbling to below zero for the first time since the
currency bloc was forged a decade ago.
This in turn has helped to stoke fears about the threat of
deflation.
But Trichet told reporters the negative inflation in the eurozone
was likely to be 'shortlived' and reflected temporary effects.
Nevertheless, the bank expects weak upward pressures on prices in the
coming months.
The ECB chief expects a pickup in the eurozone economy by the
middle of next year. Consumer prices slipped by 0.1 per cent in
June compared to the same month in 2008, the European Union's (EU)
statistics office, Eurostat said Wednesday.
This took inflation well below the ECB's annual target of close to
but below two per cent and came in the wake of the eurozone economy
shrinking by 4.8 per cent year-on-year during the first three months
of the year.
As a measure of the scale of the economic decline in the eurozone,
the ECB has cut rates seven times since last October, when the cost
of money stood at 4.25 per cent.
However, the buildup to Thursday's ECB meeting follows a steady
stream of forward-looking economic sentiment surveys pointing to
expectations of a turnaround in the European economy as the year
unfolds.
Economic confidence in Europe rose more than expected in June to
reach its highest reading in seven months, a key European Commission
report released Monday.
Despite tentative signs that the recession might be loosening its
grip on Europe, the Swedish central bank, the Riksbank announced
ahead of the ECB meeting Thursday that it was cutting interest rates
to 0.25 per cent. Sweden is not a member of euro currency bloc.
However, since the ECB's meeting four weeks ago the bleak eurozone
economic data has continued to roll in with factory order books, as
well as production, shrinking, exports slumping and unemployment on
the rise.
The numbers out of work in the eurozone jumped more than than
forecast in May to reach its highest level in more than a decade, the
EU's statistics office said Thursday.
The May increase pushed seasonally adjusted unemployment up by
273,000 to 9.5 per cent compared with a 9.3 per cent in April amid
concerns that the lay-offs will surge by the end of the year as the
recession catches up with the labour market.
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