ECB keeps interest rates at record low

Frankfurt : The European Central Bank held interest rates at a record low on Thursday and extended its liquidity safety-net in response to a lopsided recovery and worries about vulnerable banks.

ECB staff also raised their growth forecasts for this year and next but ECB President Jean-Claude Trichet said while recent economic data had been stronger than expected, recovery would occur "at a moderate pace with uncertainty still prevailing".

The ECB extended its commitment to provide unlimited one-week and one-month funding until at least January 18. It will also offer unlimited funds at its three-month tenders until at least the end of this year.

All 78 economists in a Reuters poll predicted the ECB would leave rates at 1 per cent for the 16th month in a row and the median expectation is for no change until the fourth quarter of 2011.

Analysts also expected the ECB's 22-member Governing Council to maintain the liquidity lifeline relied on by banks in countries like Spain, Ireland and Greece.

Borrowing from the ECB by banks in these countries has hit record highs in recent months even though total lending has fallen about a third since July, highlighting the difficulties still faced by some institutions.

Bond yield spreads for peripheral government bonds over German Bunds have jumped amid growing evidence of a split between core euro countries and debt-ridden laggards.

Germany grew at its fastest rate since reunification in the second quarter and more than twice as fast as the euro zone average, confirmed at one per cent yesterday.

Greece is still in recession and Portugal and Spain managed just a tenth of Germany's growth rate.

"Recent economic data for the euro area have been stronger than expected, partly owing to temporary factors," Trichet told a news conference. "Looking ahead, the recovery should proceed at a moderate pace with uncertainty still prevailing."

Nonetheless, ECB staff upgraded growth forecasts for both 2010 and 2011.

Trichet said staff now saw growth in a range of 1.4 to 1.8 per cent this year — giving a midpoint of 1.6 per cent — from the 0.7 to 1.3 per cent seen in June.

Next year, growth is expected to pick up to between 0.5 and 2.3 per cent, from 0.2-2.2 per cent in June.

The ECB's quarterly forecasts also showed inflation under control this year and next, with consumer price gains expected to be 1.5-1.7 per cent in 2010 and 1.2-2.2 per cent in 2011.

"The range for real GDP growth this year has been revised upwards owing to the stronger-than-expected rebound in economic growth in the second quarter, as well as better-than-expected developments over the summer months," Trichet said.

"For 2011, the range has also been revised upwards reflecting mainly carryover effects from the projected stronger growth towards the end of 2010," he said.

Euro zone inflation moderated to 1.6 per cent last month but there are some signs of pressure, notably Germany's powerful steelworkers union demanding a 6 per cent pay rise.

Expectations of continued ECB liquidity largesse have pushed market interest rates down from 12-month highs over the last month, although pressure points remain.

United states

Stocks rise, treasuries fall

Stocks rose and US Treasuries fell yesterday as US data showed strength in the economy, but investors were mainly focused on today's closely followed US unemployment report for economic clues.

Oil prices eased as a drop in weekly US jobless claims, an unexpected rise in pending home sales in July and slightly stronger factory orders failed to soothe concerns about economic weakness in the world's largest energy consumer.

The euro was flat against the dollar after comments from European Central Bank President Jean-Claude Trichet and the decision by the bank's Governing Council to keep interest rates at a record low of 1 per cent. US Treasury debt prices eased as some strength on Wall Street undermined the safe-haven appeal of government debt.

The Dow Jones industrial average was up 1.67 points, or 0.02 per cent, at 10,271.14. The Standard & Poor's 500 Index was up 3.53 points, or 0.33 per cent, at 1,083.82. The Nasdaq Composite Index was up 8.83 points, or 0.41 per cent, at 2,185.67.

— Reuters