European Central Bank leaves main interest rate unchanged at record low of 1 percent

ECB leaves main interest rate unchanged at 1 pct

FRANKFURT — The European Central Bank left its main interest rate unchanged at a historic low of 1 percent Thursday and announced that it would begin withdrawing some of its extraordinary programs that are supporting markets with liquidity.

Bank president Jean-Claude Trichet told reporters at a regular news conference that the euro zone economy is expected to grow at a moderate pace in 2010 and that “The current rates are appropriate.”

However, he warned the “process will be uneven and subject to risks,” noting balance sheet corrections in the financial and nonfinancial sector were still to come.

He said some of the ECB’s extraordinary liquidity measures weren’t needed anymore and they would be scaled back.

Trichet confirmed that the upcoming 12-month money offering on Dec. 16 would be the final one and that the 6-month offering would end in March.

“This is all about a gradual withdrawal of liquidity and the euro is likely to grind gradually higher as the bank is withdrawing its measures quicker than expected,” said Neil MacKinnon, global strategist at VTB Capital.

The euro neared a 16-month high of $1.5144 in the wake of Trichet’s comments but failed to break through and drifted down towards $1.5110.

Trichet has recently 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.

Two weeks ago, the ECB announced its first move to wean borrowers from its loans, by tightening the conditions on the type of collateral banks could use to get credit with the central bank.

The ECB said Nov. 20 that asset-backed securities used as collateral would need two credit ratings, rather than just one. The rule, which the ECB deemed necessary to keep high credit standards, will apply to all such securities issued as of March 1, 2010.

At the meeting later Thursday, Trichet could confirm that December’s one-year money offering will be the last, as well as details of how the ECB will provide liquidity to banks next year. The ECB could also announce plans to phase out other, shorter loan programs.

The outlook for these measures is important because despite the end of the recession, Europe’s banks remain reluctant to lend to each other as well as to households and businesses.

Calyon Credit Agricole analysts said Thursday that the ECB’s meeting is sandwiched between the fallout from the announcements of Dubai’s debt problems last week and the uncertainty of European employment data due Friday.

Trichet’s message at the news conference most likely “will be that rates are not about to go up anytime soon, but that the ECB will have to wean the market off the life support of emergency liquidity. If (Trichet) can successfully deliver such clarity, the forex market will happily digest this Trichet sandwich without a problem. The alternatives are potentially not so palatable for the euro.”

The euro was trading at $1.5125 after the decision up from the $1.5036 late Wednesday in New York.

The euro has risen in recent months, partly as a result of the ECB’s interest rate, which is at a historic low but still higher than the Bank of England’s and the U.S. Federal Reserve’s.

Higher interest rates can support a currency as investors move funds to where they earn the best returns.

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