The European Central Bank kept interest rates unchanged at a record low of 1.0 percent on Thursday, and warned that now was not the time to withdraw state support as economies emerge slowly from recession. President Jean-Claude Trichet said the eurozone faced a very gradual recovery but he stressed it was too early to end exceptional ECB measures to boost the economy.
ECB staff also raised their estimates for eurozone GDP this year and next, while inflation estimates were edged higher. Trichet announced the ECB would pump more one-year funds into the financial system at just 1 percent interest later this month. "There are increasing signs of stabilisation in economic activity in the euro area and elsewhere," he told a news conference.
"This is consistent with the expectation that the significant contraction in economic activity has come to an end and is now followed by a period of stabilisation and very gradual recovery." Germany and France, the region's biggest economies, unexpectedly bounced out of recession in the second quarter. The overall eurozone economy shrank only 0.1 percent against the previous three months, following a 2.5 percent drop in January-March. However, asked about how long the ECB would keep up its ultra-loose policy, Trichet said: "Today is no time to exit."
In an attempt to dampen expectations of a full-blown recovery, Trichet said it was vital that markets demonstrated "prudence and caution" and warned that the 16-nation bloc faced a decidedly "bumpy road" ahead. Economists worry that the momentum will be lost once central banks and governments around the world begin to take away the emergency support measures built up during the crisis.
They have also raised doubts about the speed and sustainability of any recovery because unemployment, which reached 9.5 percent in July, is at the highest in more than 10 years. Against a backdrop of encouraging data in recent weeks, ECB staff lifted their economic forecasts.
New quarterly staff projections put gross domestic product growth in the 16-nation region at between -0.5 and +0.9 percent next year, giving a midpoint of +0.2 percent, compared with a range of -1.0 percent to +0.4 percent in the June forecasts. ECB staff also upgraded their projections for this year, and said they expected GDP to fall between 4.4 and 3.8 percent in 2009, a slightly smaller contraction than the 5.1 to 4.1 percent range given in June.
The ECB expected inflation to remain subdued and price stability to be maintained over the medium term, Trichet added. All 80 economists polled by Reuters had forecast the decision to keep rates at their current all-time low for the fourth month running and markets were little moved by the decision.
Trichet stuck to the line that the eurozone's record-low interest rates remained "appropriate", bolstering expectations that the ECB won't raise them until the third quarter next year at the earliest. Sweden also kept interest rates on hold earlier on Thursday.
The need for caution on the nascent economic recovery was underscored as ECB policymakers met. Euro zone retail sales fell unexpectedly in July, data revealed, a reminder that demand remains fragile at best. Trichet confirmed the ECB would offer banks unlimited 12-month funds at a flat rate of 1.0 percent at an operation later this month, offering no sign of easing up on its unconventional measures to support the economy.
In late June, the ECB flooded markets with a record of 442 billion euros of one-year funds, which they are still digesting, in an effort to kick-start lending. The ECB had previously said two other such operations, scheduled for September and December, could be at a higher rate. But Trichet said: "This decision (to keep the rate at 1 percent) should promote the extension of credit to the euro area economy and therefore further underpin its economy."
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