ECB leaves rates unchanged at 1%
Support measures kept until recovery is solid
September 4, 2009
The European Central Bank (ECB) kept interest rates at 1 percent yesterday, and bank president Jean-Claude Trichet said the euro zone economy faced a very gradual recovery from the recession.
All 80 economists polled by Reuters had forecast the decision to keep rates at their current all-time low for the fourth month running.
ECB raised its estimates for euro zone gross domestic product (GDP) this year and next, while inflation estimates were edged higher.
However, Trichet stressed that it was too early to end its exceptional measures to boost the euro zone economy, and said the ECB would pump more one-year funds into the financial system at just 1 percent interest later this month.
"There are increasing signs of stabilisation in economic activity in the euro area and elsewhere," said Trichet.
"This is consistent with the expectation that the significant contraction in economic activity has come to an end and is now followed by a period of stabilisation and very gradual recovery."
The 16-country euro zone appears to be enjoying a speedier-than-expected recovery.
Germany and France, the region's biggest economies, unexpectedly bounced out of recession in the second quarter, while the manufacturing and service sectors are picking up.
Euro zone GDP shrank only 0.1 percent in the second quarter against the previous three months, following a 2.5 percent drop in January-March.
ECB upgraded its projections for this year, and said GDP was expected to fall between 4.4 percent and 3.8 percent this year, a slightly smaller contraction than the 5.1 percent to 4.1 percent range given in June.
The ECB expected price stability to be maintained over the medium term, Trichet added.
"It's absolutely no shock that both the refinancing rate and the deposit rates have been left on hold. Indeed previous talk about a possible reduction in the refinancing rate has all but disappeared given the signs of recovery through much of the euro area," said Investec economist Phillip Shaw.
Dirk Schumacher, a senior European economist at Goldman Sachs, said: "Numbers have been coming in better, but policy makers have made it clear that there is still some time before they can sound an all clear.
"They will keep their stance that no change is needed to policy rates or other measures."
Sweden also kept interest rates on hold earlier yesterday.
The need for caution was underscored as policy makers met. Euro zone retail sales fell unexpectedly in July, a reminder that demand remains fickle at best.
Trichet confirmed that the ECB would offer banks unlimited 12-month funds at a flat rate of 1 percent at an operation later this month, offering no sign of easing up on its unconventional measures to support the economy.
In late June, the ECB flooded markets with a record of e442 billion (R4.95 trillion) of one-year funds, which they are still digesting, in an effort to kick-start lending.
The ECB had previously said two further operations, scheduled for September and December, could be at a higher rate.
But Trichet said: "This decision should promote the extension of credit to the euro area economy and therefore further underpin its economy."
The worry is that the recovery's momentum will be lost once central banks and governments around the world begin to take away the emergency support measures built up during the crisis.
Economists have raised doubts about the speed and sustainability of any recovery because of high and rising unemployment, which reached 9.5 percent in July - the highest in more than 10 years.
"The governing council appears sceptical about the sustainability of the recovery. We expect the council to let the recovery prove itself before calling the extraordinarily accommodative policy stance into question," Deutsche Bank analysts wrote in a note.
With economies appearing to be over the worst of the crisis, attention is turning to how central banks and governments will unwind the support they have pumped into the system.
According to Shaw, exit strategies seem to be one of the key topics on the agenda of the upcoming meeting of Group of Twenty's finance ministers, which Trichet will attend.
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