Too early to declare victory on slump, says Trichet (2nd Lead)

Aug 5, 2010, 14:22 GMT

Frankfurt - The European Central Bank (ECB) chief Jean-Claude Trichet said Thursday it was too early to declare victory in the crisis that has gripped the 16-member eurozone economy and financial markets in recent months.

Trichet's comments came after the ECB's 22-head rate-setting council left its benchmark refinancing rate unchanged at an historic low of 1 per cent Thursday, amid

Speaking at his regular monthly press conference, Trichet said evidence of a solid pickup in the eurozone economy have suggested the situation was better than expected.

The ECB chief said we will have 'a very good second quarter and a third quarter that is better than expected.'

'There has been good news but let us remain prudent,' Trichet said. 'I don't declare victory. We remain cautious.'

But in contrast to signs of accelerating growth in the eurozone, concerns have emerged that world economic growth could slow in the coming months.

As a result, most analysts believe the ECB will keep borrowing costs on hold for possibly another year.

Despite the economic upswing in the eurozone, Trichet declined to lay down plans for the ECB to resume its exit from the non-conventional policy measures aimed at boosting economic confidence.

Trichet said there was 'no signalling of changes in interest rates.'

'We will do what is appropriate taking in all circumstances,' he said.

The problem for the ECB is orchestrating moves to roll back the non-conventional measures to boost liquidity in the eurozone economy without jeopardizing the region's recovery.

Overhanging the eurozone's economic outlook are the prospects of slowing growth in China but in particular in the US.

But Trichet said it was too early to be negative about the US economy.

Thursday's ECB announcement followed a statement from the Bank of England that it was also keeping rates on hold at an all-time low of 0.5 per cent. Rates in Britain have remained unchanged since March last year.

Eurozone borrowing costs have been on hold since May last year as the region's economy has battled to shake off what has been dubbed the Great Recession.

However, robust results from Europe's industrial sector and several big banks combined with rising economic confidence have now pointed to growth gaining momentum.

The euro has also gained ground in recent weeks, highlighting the emergence of more stable financial markets as the fallout from this year's eurozone debt crisis continues to fade.

The common currency gaining 0.5 per cent to 1.3223 dollars following the ECB's rate announcement.

The European Commission's closely watched economic sentiment indicator released last week showed a 29-month high in July, adding to evidence of improving economic growth.

While the ECB's governing council was deliberating in Frankfurt, Germany's Ministry of Economics and Technology said factory orders in Europe's biggest economy surged by 3.2 per cent in June.

But a rise in energy and food costs combined to drive up the eurozone's annual inflation rate to a 20-month high of 1.7 per cent in July.

This pushed inflation in the currency bloc up towards the ECB's target of below, but close to, 2 per cent. Eurozone consumer prices had stood at 1.4 per cent in June.

Despite a pickup in consumer prices, the ECB expects inflationary pressures remain contained.