ECB leave rates unchanged at 1%

INTEREST rates were kept on hold by the European Central Bank (ECB) yesterday with analysts confident it will stay that way until the middle of next year.

The ECB did however caution against hopes of a speedy economic recovery after leaving benchmark interest rates at a record low 1% for the fifth month in a row.

ECB president Jean-Claude Trichet also turned up the heat on governments to rein in ballooning budget deficits and said he saw hopeful signs of a normalisation in money markets given lower demand for central bank loans.

Ulster Bank chief economist, Simon Barry said the council’s view that the current rates “remain appropriate” is an important signal that rates are on hold, with very little chance of a near-term move.

“The ECB’s overall assessment of the state of the euro area economy was not much changed from that of a month ago. President Trichet again went out of his way to stress that he remains cautious on the economic outlook which continues to be characterised by high uncertainty,” he said.

Mr Barry said he continues to think rates are likely to be headed higher by the end of 2010 and a stronger than expected recovery could see rate normalisation beginning a bit earlier than that.

“However, both the euro area economy and the corresponding ECB-speak clearly have some way to go before a scenario of higher rates becomes a reality,” he said.

The ECB has urged governments to wind back extra spending in 2011 at the latest and economists said the stabilising economy gave the central bank more room to exert pressure on governments. The Bank of England also kept its rates on hold yesterday, as was widely expected, but the Reserve Bank of Australia on Tuesday became the first Group of 20 central bank to raise rates after the recession hit.

KBC chief economist, Austin Hughes said he believes there to be some considerable distance from any interest rate hike from the ECB or indeed any of the world’s other ‘major’ central banks.

“We continue to believe that the ECB is unlikely to raise rates until the end of next summer at the earliest. Although there is a clear sense that the worst of the downturn may be behind us, Mr Trichet again emphasised that the recovery is unlikely to develop in a way that would threaten the need for an early tightening of policy.

“While the easing in demand for ECB liquidity is a sign of a technical improvement in market conditions, there is little doubt that far more threatening fundamental challenges lie ahead,” he said.