ECB signals it is in no rush to hike rates (Roundup)

Oct 8, 2009, 14:28 GMT

Venice - The European Central Bank (ECB) left interest rates unchanged for the sixth consecutive month Thursday with ECB chief Jean-Claude Trichet signalling that any monetary tightening remained a long way off.

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.

Indeed, speaking at a press conference following the meeting of the ECB's 22-head rate setting council, Trichet was cautious about the eurozone economic prospects and warning in a reference to the current strong euro about the risks caused by currency volatility.

'It's no time to declare victory,' said the ECB chief, who added that action was still needed to shore up market confidence in the face of 'exceptionally high' economic uncertainty and the threat of accelerating unemployment.

The ECB's announcement coincided with the Bank of England (BOE) saying in London that it was 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 in line with analysts' forecasts.

Thursday's interest rate announcements by the ECB and the BOE came one year after the two banks joined 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.

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

At his press conference, Trichet went on to call 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 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 the eurozone's key export sector.

However, coming against the backdrop of fears that rising unemployment could hit consumer spending in the eurozone, worries about the euro undercutting exports have led some analysts to question 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.

Echoing remarks made by Group of Seven finance officials at the weekend, Trichet said: 'We consider that excess volatility and disorderly movements ... have adverse implications for economic and financial stability.'

Trichet also went on to again point out to the US administration's backing for a strong dollar, saying it was 'extremely important in the current circumstances.'

He said that both sides of the Atlantic would 'co-operate as appropriate' but he insisted he would not be drawn 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.

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 early to declare that the financial crisis that had engulfed the world economy over the last year has come to an end. Those who say it is business as usual are 'plain wrong,' he said.

Data released last month 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 over the medium term, he again said the bank sees consumer prices returning to positive territory in the coming months.