ECB in wait-and-see mode after leaving rates on hold
LUXEMBOURG — The European Central Bank left interest rates on hold at a record low of 1 per cent yesterday with ECB chief Jean-Claude Trichet indicating that the bank was in no rush to change borrowing costs as it sizes up the economic fallout from the global recession. Meeting in Luxembourg at one of twice yearly out-of-town sessions, the Frankfurt-based ECB’s decision to leave rates 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.

Trichet would 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) 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.

This followed the ECB’s announcement a month ago of plans to help spur economic growth by buying up to 60 billion euros ($84 billion) of covered bonds. The covered-bond programme to be launched on July 6 and formed part of what Trichet described as the bank’s programme of “enhanced credit support.” Trichet insisted yesterday 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. Yesterday’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 pick-up 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 on Wednesday. — DPA