ECB Leaves Interest Rates on Hold for 16th Month

The European Central Bank has left interest rates at 1 percent for the 16th consecutive month as a still-uncertain global outlook clouds optimism about the eurozone's recovery.

During the press conference Jean-Claude Trichet, head of the European Central Bank, offered a slightly more optimistic view of the euro area’s economy, but also extended its lifeline to troubled banks in the zone amid signs that the gap in growth between Northern and Southern Europe was growing.

Moreover, Mr. Trichet said that commercial banks would be provided unlimited funds at the benchmark interest rate, which was left at 1 percent, for as long as necessary” and at least through mid-January.

Since the beginning of the financial crisis, the European Central Bank has been providing huge amounts of liquidity to banks that have trouble obtaining short-term funds from other banks or in the money markets.

The European Central Bank, which sets monetary policy for the 16 countries in the euro zone, is unlikely to raise interest rates until growth is better established, provided inflation remains below the official target of 2 percent.

In Europe’s two-speed recovery, Germany and other export-oriented countries in the north are booming, while Spain, Portugal, Greece and other countries, primarily in the south, struggle with high government debt and slow growth or declines.

Loans from the European Central Bank have been crucial for the euro zone’s weaker banks, which are concentrated in the countries with the weakest economies, like Greece and Spain. Eurostat said Greek economic output fell 1.5 percent in the second quarter compared with the previous quarter. Spain grew just 0.2 percent.

The central bank has been trying to take banks gradually off life support, but comments last month by Axel A. Weber, president of the German central bank, indicate that policy makers are ready to continue providing unlimited loans for months to come.

ECB Leaves Interest Rates on Hold for 16th Month
9/5/2010 10:22:37 PM