Official borrowing costs in the eurozone have been left at record lows for the 16th consecutive month as the European Central Bank sticks to its cautious stance on the region’s economic prospects.
The decision to leave the ECB’s main interest rate at 1 per cent had been widely predicted. Although growth has picked up in recent months, eurozone inflation, which was at 1.6 per cent in August, remains in line with its target of an annual rate “below but close” to 2 per cent.
Jean-Claude Trichet, president, announced the that the ECB would extend into 2011 its policy of matching in full eurozone banks’ demand for liquidity on a weekly, monthly and three-monthly basis.
The move reflects continuing uncertainty about the strength of the economic recovery and the vulnerability of banks in eurozone “peripheral” countries such as Spain, Ireland and Greece, where demand for ECB liquidity has been strongest.
After the publication of the results of European bank “stress test” results in late July, financial market tensions showed signs of easing. The volume of ECB liquidity in the financial system has also fallen.
But the amount outstanding on ECB operations is still almost €600bn, compared with nearer €400bn prior to 2007. Market tensions rose again recently over the public cost of supporting Ireland’s bank system.
Mr Trichet also said the ECB’s forecast for eurozone growth this year would be revised upwards from the range with a mid-point of 1 per cent forecast in June. “Annual real GDP growth will range between 1.4 per cent and 1.8 per cent in 2010 and between 0.5 per ent and 2.3 per cent in 2011.
This revision was the result of a “stronger-than-expected rebound in economic growth in the second quarter, as well as better-than-expected developments over the summer months.
“For 2011, the range has also been revised upwards reflecting mainly carryover effects from the projected stronger growth towards the end of 2010,” said Mr Trichet.
However, he said it was essential to remain “cautious and prudent” about the strength of the recovery.
So far, the ECB has not been convinced that the pace of expansion has become self-sustaining – which would make it capable of withstanding a significant slowdown in the US or Asia.
A double dip back into recession in the US could hit peripheral eurozone countries especially hard by reducing their scope for boosting growth through exports.
Financial markets do not expect the ECB to lift its main interest rate until well into 2011.
So far, the eurozone’s recovery has been dominated by an export-led surge in Germany.
The ECB is likely to take some comfort from breakdown of eurozone gross domestic product data for the second quarter, published by Eurostat, the European Union’s statistical unit.
These showed exports rose by 4.4 per cent compared with the previous three months. But consumer spending grew by a faster-than-expected 0.5 per cent and made a significant contribution to the overall 1 per cent rise in GDP. That pointed to a broadening of the upturn.
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