February 4, 2010 / 1:56 PM / 10 years ago

ECB holds rates, sees moderate, uneven recovery

FRANKFURT (Reuters) - The European Central Bank kept interest rates at a record low of 1.0 percent on Thursday and reaffirmed its view that the euro zone’s economic recovery would be modest and uneven this year.

All 86 economists in a recent Reuters poll had expected the ECB to keep rates unchanged this month and only two had seen any change before the middle of the year.

“Euro area economic activity continued to expand around the turn of the year. Looking ahead, the Governing Council expects the euro area economy to grow at a moderate pace in 2010,” European Central Bank President Jean-Claude Trichet told a news conference.

“The recovery is likely to be uneven and the outlook subject to uncertainty,” he said.

Economists expect the euro zone economy to grow 1.2 percent this year and 1.6 percent next year, following an expected contraction of 3.9 percent in 2009.

Analysts are already looking to the ECB’s March meeting for any hints of further unwinding its crisis support measures.

“The Governing Council will, in early March, take decisions on the continued implementation of the gradual phasing-out of the extraordinary liquidity measures that are not needed to the same extent as in the past,” Trichet said.

The Bank of England also kept rates on hold, at 0.5 percent, and halted its quantitative easing program after 11 months of asset purchases.

Markets were little changed by the decision.

“As expected, nothing happened,” said Michael Schubert, economist at Commerzbank. “The important decisions will come in March, when the ECB will think about the next step of its exit strategy.”

To soften the impact from the global financial crisis, the ECB has slashed interest rates, purchased covered bonds and offered unlimited funds for banks.

STRONGER DATA

Recent official data showed economic sentiment in the euro zone strengthened much more than expected in January and December while unemployment in Germany — the largest economy in the bloc — rose less than forecast last month.

Price pressures remained muted in the euro zone, despite the nascent recovery.

“Just looking at the ECB’s famous one-needled compass of price stability, the Governing Council could probably take a sabbatical year and return in 2011,” ING economist Carsten Brzeski said.

Still, the unemployment rate in the euro zone rose to 10 percent in December — the highest since August 1998.

And the financial troubles of euro zone member Greece could endanger the currency bloc’s recovery.

GREEK PROBLEMS

Greece has been hit hard on international markets after the country’s new Socialist government revealed in October its budget deficit was twice as big as previously announced and more than four times the euro zone ceiling of 3 percent of GDP.

This has sparked talk about a possible bailout by the European Union and fears about the stability of the euro area.

Asked after the January ECB meeting how realistic he regarded talk of Greece or any other state being forced out of the euro zone, Trichet said he did not comment on what he called absurd hypotheses.

The European Commission on Wednesday approved Greece’s plan to cut its budget deficit to below 3 percent of gross domestic product in 2012 from 12.7 percent in 2009, but said further steps must be taken to cut public sector wages and put finances in order.

“Greece now has to walk the talk,” Commerzbank’s Schubert said, adding that it would be “utterly wrong” for the ECB to offer help to Greece now before the country had done its utmost to solve its problems.

The ECB’s February meeting is the last before euro zone politicians anoint a successor to ECB Vice-President Lucas Papademos, with Portugal’s Vitor Constancio and Luxembourg’s Yves Mersch both nominated to replace him.

Constancio is said to have a slight edge in the running, bringing a slight dovish bias to the six-strong Executive Board. This would likely be offset if policymakers choose Germany’s Axel Weber over Italy’s Mario Draghi to replace Jean-Claude Trichet as ECB president next year.

Reporting by Eva Kuehnen; editing by Mike Peacock

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