ECB holds rates at historic low amid weak economy (2nd Lead)

Oct 8, 2009, 13:24 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.

   Speaking at a press conference following the meeting of the ECB's 22-head rate setting council, bank chief Jean-Claude Trichet painted a cautious picture of the eurozone economic prospects saying unemployment could accelerate and that economic uncertainty 'remains exceptionally high.'

'It's no time to declare victory,' the ECB chief said adding that axction still needed to be taken to shore up market confidence.

'Recovery,' Trichet warned, 'is expected to be rather uneven, supported by temporary factors.' This includes the big fiscal stiumulus plans rolled out by European governments over the last year aimed at countering the recession.           

   The ECB's announcement coincided with the Bank of England (BOE) saying in London that it was also leaving borrowing costs unchanged at 0.5 per cent.  

   The BOE also decided against extending its 175-billion-pound (279-billion-dollar) quantitative easing (QE) program. 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.

At his press conference, Trichet called on governments to begin consolidating their finances in 2011 as they wind back the big anti-crisis spending programs they launched.

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

   While a stronger euro might help to dampen imported inflationary pressures, it also increases the competitive pressures on eurozone exports.

   However, 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 with the common currency climbing again Thursday in the wake of the ECB announcement.

   Answering a question about whether the ECB was concerned about the strength of the euro, Trichet repeated 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.

   Trichet also went on to again point out to financial markets that the US administration backs a strong dollar, saying it was 'extremely important in the current circumstances'.

He said that the both sides of the Atlantic would 'co-operate as appropriate' but he insisted he would not comment on any talk of currency market intervention.

   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 became the first member of the Group of 20 leading world economies to raise interest rates.

   However, in his comments to reporters, Trichet insisted that it was too declare that the financial crisis that had engulfed the world economy over the last year has come to an end.

Those that say it is business as usual are 'plain wrong', said Trichet.

   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.

While Trichet said the ECB expects low inflationary pressures in the medium term over the medium term, it sees consumer prices returning to positive territory in the coming moonths.