Jul 2, 2009, 14:25 GMT
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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