European Central Bank leaves key rate at 1 pct; set to discuss special lending programs

European Central Bank leaves rate at 1 pct

LONDON — The European Central Bank left its benchmark interest rate unchanged at 1 percent Thursday and confirmed that it will continue to scale back special lending measures it introduced during the financial crisis, even though the economy in the 16 countries that use the euro is only barely growing.

Bank president Jean-Claude Trichet said the economic recovery in the eurozone was “on track” but that it was likely to “remain uneven.” The eurozone grew by only 0.1 percent in the last threee months of 2009 as the recover in Germany stalled.

“Overall, the governing council expects the euro area economy to grow at a moderate pace in 2010, in an environment marked by continued uncertainty,” Trichet said at his news conference after the anticipated decision by the bank’s rate-setting body.

Trichet said the ECB expects growth this year to be between 0.4-1.2 percent, against December’s forecast of between 0.1-1.5 percent. For 2011, the ECB expects growth of 0.5-2.5 percent, up from December’s forecast of 0.2-2.2 percent.

Trichet also said price developments “remain subdued” and that the ECB expects inflation to be around 1 percent in the near-term, below the target of below, but close to 2 percent. In 2011, he said inflation was likely to be between 0.9-2.1 percent.

He also confirmed that upcoming auction of 6-month credits on March 31 will be the final operation and that the interest rate charged for shorter-term three-month loans will not be fixed at the benchmark rate but instead return to a variable rate from April 28.

“The governing council will continue to implement the gradual phasing-out of the extraordinary liquidity measures,” said Trichet.

“In order to counter effectively any threat to price stability over the medium to longer term, the liquidity provided will be absorbed when necessary,” he added.

The central bank introduced a range of cheap bank lending operations when the financial crisis first exploded to allow the commercial banks to have access to money at a time when the credit markets had seized up.

Trichet also praised Greece’s latest set of budget cuts announced Wednesday and repeated his previous comment that the country’s departure from the eurozone was an “absurd hypothesis.”

He said the ECB was “making a very positive judgement” about Greece’s decision Wednesday to slash its budget by a further €4.8 billion this year and that there was no reason for the International Monetary Fund to get stump up cash.

“I do not trust it would be appropriate to have the introduction of the IMF as a supplier of help thru standby or any kind of such help,” Trichet said.

The European Central Bank’s latest rate decision came after the Bank of England kept its main interest rate on hold at the record low of 0.5 percent and held back from asking the government for the ability to pump more cash into the economy.