European Central Bank meets amid economic uncertainties

Oct 7, 2010, 3:01 GMT

Frankfurt - The European Central Bank (ECB) is meeting Thursday with the euro's ascent on global currency market underlying the mounting pressures facing the monetary authorities in the 16-member eurozone.

The ECB is widely expected to announce that it has left its benchmark interest rate on hold for the 17th consecutive month at an historic low of 1 per cent in a bid to shore up economic confidence in the currency bloc.

But the buildup to the ECB's announcement comes against the backdrop of moves by leading central banks to embark on a new round of non-interest rate emergency monetary policy measures aimed at addressing concerns about dwindling inflation and a faltering recovery.

This in turn has helped to trigger the threat of a currency war between the world's financial superpowers as the new push to expansionary monetary policies helps to weaken currencies and consequently boost national economic competitiveness.

The Bank of Japan led the way on Tuesday effectively lowering interest rates to zero and unveiling a series of other non-interest rate moves in response to the country's fragile recovery and the risk of deflation.

The US Federal Reserve and the Bank of England have also indicated they might introduce fresh stimulus measures to inject additional liquidity into their national economies and to bolster economic growth.

But the Frankfurt-based ECB wants to pursue the opposite course and hopes to begin rolling back the unconventional measures it has employed to combat the crisis that engulfed the global economy over the last two years.

The prospects of other major industrialized economies adopting more relaxed monetary policies than the eurozone have already resulted in the euro gaining ground on foreign exchange markets.

The problem for the ECB and eurozone economic policymakers is that a strong euro could undercut the currency's bloc recovery from what was the world's deepest recession in a generation.

This is especially the case as exports have been the key driving force behind the currency bloc's economic growth.

The euro is hovering close to an eight-month high against the dollar in part a result of market speculation that the ECB could break ranks with other top central banks over the so-called quantitative easing (QE) measures.

The common currency edged its way back up towards 1.40 dollars ahead of the ECB's governing council's meeting.

Consequently, ECB chief Jean-Claude Trichet faces a delicate balancing act Thursday at his regular monthly press conference following the meeting of his bank's 22-head rate setting council.

Analysts argue that the euro could strengthen further if Trichet sounded too tough about ending the non-interest rate stimulus measures.

Also boiling away in the background of the ECB meeting are the ongoing market tensions unleashed by the battles in parts of the eurozone to slash their high debt-and-deficit levels.

While the scale of the cuts in public spending facing nations such as Greece, Portugal, Spain and Ireland is likely to act as a brake on their growth rates, states like Germany continue to turn in a solid economic performance.

This has also served to highlight the economic divergence that has emerged across the eurozone resulting in renewed criticism of the ECB's so-called one-size-fits all interest rate policy.

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