ECB holds rates at historic low (1st Lead)

Oct 8, 2009, 12:02 GMT

   Venice - The European Central Bank (ECB) left interest rates unchanged for the sixth consecutive month Thursday amid concerns that the strong performance of the euro could place at risk the fragile economic recovery taking shape across Europe.

   Holding one of its regular out-of-town meetings in Venice, the Frankfurt-based ECB kept interest rates at an historic low of 1 per cent with analysts believing the cost of money in the 16-member eurozone could be on hold well into the new year.

   The ECB's announcement coincided with the Bank of England (BOE) saying in London that it was also keeping borrowing costs unchanged at 0.5 per cent and had decided against extending its 175-billion-pound (279-billion-dollar) quantitative easing (QE) programme. The BOE's moves were also in line with analysts' forecasts.

   Thursday's interest rate announcements by the ECB and the BOE came one year after the two banks joined the world's other top central banks in launching coordinated action to shore up global economic confidence in the wake of the implosion of the US investment bank Lehman Brothers.

   Economists believe the eurozone returned to an economic growth path during the three months to the end of September after its two biggest economies - Germany and France - unexpectedly climbed out of recession during the second quarter.

   But in the runup to Thursday's meeting of the ECB's 22-head rate-setting council, top European officials have been expressing worries about the euro, which has gained about 10 per cent since the early months of the year.

In particular, while a strong euro might help to dampen imported inflationary pressures, it makes the eurozone's exports more competitive.

   Coming against the backdrop of fears that rising unemployment could hit consumer spending in the eurozone, worries about the euro undercutting exports have lead to economic forecasters raising questions about the sustainability of the currency bloc's recovery.

The euro jumped to a one-year high of more than 1.48 dollars early this week.

The euro edged up 0.5 per cent back towards 1.48 dollars after the ECB governing council's announcement as made.

    With this in mind, some analysts believe ECB chief Jean-Claude Trichet could use his monthly press conference set down for later Thursday to reflect ECB worries about the current strength of the euro.

   While stepping back from specifically commenting on the foreign exchange market, Trichet is expected to repeat the warning made at the weekend of Group of Seven finance officials about the economic and financial risks posed by 'excess volatility and disorderly movements' in national currencies.

   In addition, Trichet is likely to again point out to financial markets that the US administration backs a strong dollar.

   But in the light of only tentative signs of a recovery in the eurozone, the ECB chief is also expected to tell reporters that the bank plans to leave in place the so-called unconventional measures it has launched to shore up financial market confidence.

   Eurozone borrowing costs have been on hold at 1 per cent since April, after the ECB delivered a rapid round of rate cuts aimed at trying to contain the economic and financial crisis triggered by the Lehman Brothers' collapse.

   But Australia this week becoming the first member of the Group of 20 leading world economies to raise interest rates.

   Consequently, Trichet's comments to reporters are likely to be closely watched by analysts for hints as to when the ECB thinks the eurozone might be clear of recession and that it could consider tightening monetary policy.

   But since the ECB chief's last press conference earlier in September, data showed eurozone consumer prices falling by 0.3 per cent in September compared to the same month last year.

   This left annual inflation well below the ECB's target of inflation coming in at close to but below 2 per cent.

   And in a report released ahead of Thursday's meeting, the European Union's statistics office revised down its second-quarter economic growth figures saying the eurozone contracted by 0.2 per cent instead of a previously estimated 0.1 per cent.

   Moreover, the International Monetary Fund (IMF) warned in its latest review of the world economic outlook that the eurozone faces only sluggish economic growth as it battles to put behind it the world economy's biggest downturn in a generation.

   Although marginally better than its last set of forecasts, the IMF expects the economy built around Europe's common currency to contract by 4.2 per cent this year before growing by an anaemic 0.3 per cent in 2010.

   This is roughly in line with the ECB's own forecasts of the eurozone growing at just 0.2 per cent next year.