THE EUROPEAN Central Bank kept interest rates on hold at a record low yesterday and hinted growth could return sooner than previously thought, although the euro zone economy will remain weak this year.
ECB president Jean-Claude Trichet said rates remained appropriate at the current level of 1.0 per cent, adding that a fall in consumer prices in the euro zone’s recession-bound economy was temporary.
He also said the ECB had no intention of scaling back its plan to buy €60 billion in covered bonds – one of its unconventional policies to revive growth by lowering long-term interest rates – despite a fairly slow start.
The euro zone’s gross domestic product plunged 2.5 per cent in the first quarter and markets expect that the ECB will keep rates – the highest among major central banks – steady until the end of the third quarter of next year.
“In general, the overall mood is – right or wrong – today a little bit better than it was before,” Mr Trichet said. “Economic activity over the remainder of this year is likely to remain weak, although the pace of contraction is clearly slowing down.”
He said the euro zone economy was likely to inch out of recession by the end of this year but not necessarily back to growth.
Mr Trichet’s comments – that he saw the recession bottoming out and inflation turning positive before year end – were taken negatively by bond investors and two-year Schatz yields hit a session high during his post-decision news conference.
“In the current situation the rate outlook is still the same,” said Lloyds TSB economist Kenneth Broux. “We need to see PMIs [purchasing managers’ indexes] above 50 and stay there for a few months – if we see a follow-through I think the markets will bring rate-hike expectations earlier.”
The ECB has cut interest rates by 325 basis points since October, but they remain the highest among the biggest developed economies.
The Bank of England, which also met on yesterday, left rates at 0.5 per cent but raised its bond purchases to tackle the UK recession by £50 billion (€58.4 billion).
Mr Trichet gave no signal that the ECB was planning any imminent exit from its supportive stance and said that the ECB had not changed its attitude to rates in the last month.
“The balance of risks to activity is balanced . . . and the same for inflation. From that standpoint it would be much more correct to say that we are exactly in the same kind of mood that we were in our last meeting,” he said.
Asked if rates could rise even before growth returns, he added: “We will do whatever is necessary to permit the delivery of price stability to be effective and to be credible. We have only one needle in our compass and we will continue to do whatever is necessary to deliver.”
He also said the ECB was not planning any new credit-easing measures to boost the economy, and would give liquidity injections and its covered bond purchase programme time to work.
– (Reuters)
