ECB Leaves Rates Unchanged at 1%

Eurozone official interest rates were left unchanged at 1 per cent by the European Central Bank on Thursday as policymakers await signs of the region’s economic recovery gaining momentum.

The decision by the ECB’s governing council was widely-anticipated, and financial markets have little expectation of Jean-Claude Trichet, ECB president, announcing additional steps to combat the eurozone recession later on Thursday.

Instead attention is likely to focus on Mr Trichet’s assessment of the eurozone economic outlook and the impact of emergency measures already announced by the ECB. Although the eurozone’s recession has shown signs of losing its intensity, the green shoots” of recovery appear less well established than in the US.

The governing council had gathered in Luxembourg – at one of the two meetings a year that the ECB holds outside its home town of Frankfurt, Germany.

Since October, the ECB has cut its main interest rate by 325 basis points to the lowest ever. ECB policymakers have been wary about bringing the main policy rate closer to zero, especially as overnight market interest rates are already lower than 1 per cent. But the ECB has massively expanded its operations providing liquidity to the banking system.

Last week the ECB pumped in €442.2bn in one-year loans – the largest amount it had ever injected in a signal operation – in the hope that a revival in the eurozone banking system will feed through into the wider economy. Mr Trichet is likely to step up calls for banks to use the extra funds to grant re-start the flow of credit to businesses and households.

Eurozone GDP contracted sharply at the end of last year and early in 2009. Signs of a subsequent recovery have been based largely on economic confidence surveys.

Meanwhile, the ECB has also seen inflation turning negative for the first time since records began, and hugely undershooting its target of an annual rate below but close” to 2 per cent. Data earlier this week showed consumer prices were 0.1 per cent lower in June than a year before, and Mr Trichet has warned the annual rate could be negative for some months. ECB forecasts released last month showed the target range still being undershot next year.

They showed 2010 inflation in a range between 0.6 per cent and 1.4 per cent. Such low levels would usually justify further ECB monetary policy action.

However Mr Trichet argues the long-term inflation expectations remain firmly anchored in line with the ECB. At the same time, the central bank is wary about the longer term impact on inflation and financial stability of the emergency measures it has taken already.

Mr Trichet has argued that the eurozone could return to positive quarterly growth rate in the middle of next year.

ECB Leaves Rates Unchanged at 1%, Financial Times
7/2/2009 9:09:36 AM