Leadership

Trichet says interest rates 'appropriate'

02.07.2009
The current interest rates set by the European Central Bank (ECB) “remain appropriate”, the President of the ECB Jean-Claude Trichet has said.

Speaking following the meeting of the ECB’s Governing Council in Luxembourg today, in which it decided to leave interest rates unchanged, Trichet explained that as past interest rate cuts have been passed on to businesses and consumers by financial institutions, the resulting improvement in financing conditions should provide “ongoing support for economic activity in the period ahead”.

Addressing the growing concerns over deflation in the eurozone, Trichet said the ECB expects that the extremely low/negative inflation rates currently being experienced in Europe will be short-lived.

While annual inflation rates are projected to remain temporarily in negative territory over the coming months, “they will turn positive again”, he stressed.

Trichet outlined the likelihood that European economic activity over the rest of this year will remain weak, but said it should decline less strongly than was the case in the first quarter of 2009.

Looking ahead to 2010, he noted that following a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected by the middle of the year.

The significant policy stimuli adopted in all major economic areas should support growth globally, including in the euro area, he said.

As was widely expected by analysts, the ECB did not announce any further extraordinary policy measures following the meeting of its Governing Council today.

Indeed, Trichet noted that many of the policy measures that had been taken in recent months to support specific segments of the economy should be phased out “in a timely manner”.

“It is crucial that the focus is now on strengthening the adjustment capacity and flexibility of the euro area economy in line with the principle of an open market economy and free competition,” he said.

However, he hailed the almost half a trillion euro injection of extremely cheap one-year liquidity into European banks last week as “an enormous success”, but stressed that the ECB would have to keep an eye on banks to ensure they were passing the benefits of these cheap funds onto their commercial and personal customers.

He also announced that the ECB’s plan to buy covered bonds will go ahead as planned this month, starting on the 6 July, with bonds maturing after three and 10 years being targeted.

The ECB today announced its decision that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1pc, 1.75pc and 0.25pc respectively.

This was in line with analysts’ expectations who were predicting no change on the main base rate of 1pc, which, as a mark of the severity of the economic crisis, now stands at the lowest it has ever been.