European Central Bank keeps key interest rate unchanged, to end some support measures

ECB to end some liquidity support measures

FRANKFURT — The European Central Bank left its main interest rate unchanged at a historic low of 1 percent on Thursday and took the first steps to withdraw some of its extraordinary liquidity support now that recovery is under way.

Bank President Jean-Claude Trichet told reporters at his regular news conference that the economy of the 16 countries that use the euro will grow at a moderate pace next year, but that the recovery would be “uneven and subject to risks” as firms try to shore up their finances in the wake of the most savage recession in generations.

Trichet said the current rate was “appropriate” — an indication that interest rates won’t change anytime soon — and the decision to keep borrowing costs unchanged was unanimously agreed by all members on the governing council.

But given that the recession in the eurozone has ended — figures earlier confirmed that the eurozone economy grew by a quarterly rate of 0.4 percent in the July-September quarter — Trichet said the ECB could start unwinding some of the extraordinary liquidity measures that were introduced to prevent the collapse of the banking system.

“The improved conditions in financial markets have indicated that not all our liquidity measures are needed to the same extent as in the past,” said Trichet.

He confirmed widespread speculation that the upcoming 12-month money offering on Dec. 16 would be the final one and added that the 6-month offering would end in March next year.

Trichet has voiced worries that banks may be getting addicted to the central bank’s cheap short-term loans — suggesting he favors a gradual withdrawal of the measures to help the financial sector increase lending again.

“The ECB will continue providing additional liquidity in the coming months but today’s message to banks was crystal clear; do your homework, free refills are coming to an end,” said Carsten Brzeski, senior economist at ING Financial Markets in Brussels.

As Trichet announced the details, the euro shot up towards its 16-month high of $1.5144 but its failure to break through the level pushed the single European currency back down to the $1.51 mark.

Trichet said the measures announced Thursday should not be interpreted as a signal that interest rates will be going up anytime soon — especially as medium to longer term inflation expectations “remain firmly anchored” to the Bank’s target to keep inflation below, but close, to 2 percent.

The new ECB staff forecasts on growth and inflation also confirm market expectations that interest rates will not be changing at least until late 2010. Growth is expected to be an anemic 0.8 percent in 2010 and only 1.2 percent in 2011, while inflation is only forecast to be 1.4 percent in 2011.

Even though recovery is under way, analysts said it will take years for the output lost during the recession to be made up and that is keeping a lid on inflationary pressures in the economy.

The high euro is also reining in price pressures by pushing import costs down.

Trichet, as well as other policymakers both at the ECB and in governments, are concerned that the high euro could derail the fledgling economic recovery by pricing out European exports, but have so far done nothing directly in the foreign exchange markets to alleviate the upward pressure on the currency.

As a result, he went to China last week in an attempt to convince the authorities there to let their currency appreciate against the dollar. The yuan is set artificially low against the dollar by China to keep its exports cheap in U.S. markets — as a result, floating currencies like the euro and the Japanese yen have borne the brunt of the dollar’s downward adjustment in the currency markets.

Though nothing visible was accomplished by the meeting, Trichet said his meetings in China were important.

He also reiterated his view that the U.S. believes in a “strong dollar,” and that the U.S. Treasury Secretary Tim Geithner and U.S. Federal Reserve chairman Tim Geithner were “sincere” in expressing the policy.

On the Net:

www.ecb.int