The European Central Bank cautioned against hopes of a speedy economic recovery after leaving benchmark interest rates at a record low 1.0 percent on Thursday for the fifth month in a row. ECB President Jean-Claude Trichet also turned up the heat on governments to rein in ballooning budget deficits, and said he saw hopeful signs of a normalisation in money markets given lower demand for central bank loans.
But overall, the assessment of the 22-member Governing Council - meeting in Venice in the second gathering outside its Frankfurt headquarters this year - was little changed from last month, he said. "Current rates remain appropriate," Trichet told journalists at his news conference, cementing expectations that the ECB will not change rates until the third quarter of 2010.
"The incoming information and analysis since our last meeting in early September have confirmed our previous assessment." Still, financial markets moved in reaction to Trichet's steady-hand message, especially since he failed to sharpen his tone on exchange rates and the strength of the euro.
Trichet said in a Reuters interview on Monday that a rebalancing in the global economy did not mean the dollar should weaken against the euro, but when asked about currencies on Thursday he stuck to his standard message that US support for a strong dollar was important and excess FX moves unwelcome.
"It was actually what he didn't say that caused the market to buy the euro," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto, after the euro rose to session highs against the US currency. "Before Trichet's briefing, there was chatter in the market that he may give more forceful comments on having a 'strong' dollar. But Trichet just gave the standard language so we saw some relief rally for the euro."
The euro has gained roughly 3 percent against the dollar since the ECB's September rate meeting and about 16 percent in the last seven months. Similarly, eurozone government bond futures rose to a contract high after Trichet sounded sanguine on inflation, which he said was expected to remain moderately positive over the ECB's policy horizon.
"It's rather what he hasn't said today," said Phil Jordan, a senior trader at Monument Securities in London. "He didn't labour (the point) that inflation would go up strongly." Eurozone inflation fell 0.3 percent in September, more than expected, according to the flash estimate, after dipping 0.2 percent in August.
Trichet did adjust his language slightly on the pace of the recovery, predicting that this would be "gradual" as opposed to "very gradual" after the September meeting. But he warned that the recovery would likely be rather uneven, and said uncertainty remained high. The eurozone economy shrank by a revised 0.2 percent in the second quarter of the year, and analysts expect it to have grown 0.3 percent in the July-September quarter.
He also beefed up calls to governments to bring their budgets into line, saying consolidation efforts should go beyond standard deficit-trimming benchmarks. "The need for ambitious and realistic fiscal exit and consolidation strategies is becoming increasingly pressing," he said. "It is vital that governments put in place concrete structural measures and convincingly communicate that they are committed to ensuring the sustainability of public finances."
The ECB has urged governments to wind back extra spending in 2011 at the latest and economists said the stabilising economy gave the central bank more room to exert pressure on governments. "When there is nothing to say about monetary policy or the economy, central bankers like to devote some time to their real hobby-horse: fiscal policy," ING economist Carsten Brzeski said. Trichet said a drop-off in demand for long-term ECB funds tended to be a positive sign, after banks borrowed just 75 billion at the ECB's last 12-month operation compared to 442 billion in June.