European rates

The ECB announced Thursday that it expected euro zone gross domestic product to decline by as much as 5.1 percent this year. The bank had predicted in March that economic activity in the bloc would drop by only around 3.2 percent.

But the rate of decline was expected to slow during the course of 2009, and rise to between -1.0 percent and 0.4 percent next year, ECB chief Jean Claude Trichet told a news conference at the bank's headquarters in Frankfurt.

The central bank also announced Thursday that it would not make further cuts to interest rates for the time being. When the ECB lowered rates to 1.0 percent on May 7, Trichet had held out the possibility of further rate cuts this year.

Trichet refused to be drawn on whether the benchmark rate would be lowered in the near future however, saying only that the bank's governing council felt "the present level of interest rates to be appropriate."

Trichet also noted that inflation was "firmly anchored" and would not return to positive territory until the end of 2009.

"After the extremely weak first quarter, activity over the remainder of this year is expected to decline at much less negative rates," Trichet said. "After a stabilization phase, positive quarterly rates are expected by mid 2010."

Overall, the ECB's benchmark rates have been cut by 325 basis points since last October in an effort to fight the recession that has affected the 16-member euro zone.

Lots of cash, little lending

All these rate cuts notwithstanding, euro zone credit has become tighter this year. The chief reason being that commercial banks have not passed on much of the unlimited cash currently at their disposal.

Sylvain Broyer, an economist with global financial services company Nataxis, said Thursday's decision to keep interest rates stable "was no surprise."

In discussing the bank's plans to buy up approximately 60 billion euros ($85 billion) worth of low-risk bonds, Trichet said the purchases would be spread across the euro zone. The bank would buy bonds rated at least AA or the equivalent in primary and secondary markets. Trichet expects purchases to be completed by June 2010.

Economists are also interested in how the ECB is going to pay for the bonds. The options available are either to print new money, sell off existing assets or issue debt of its own.

The ECB also left two other rates unchanged. The marginal lending rate will remain at 1.75 percent and the deposit rate will stay at 0.25 percent.

Compared to the first quarter of last year, the 16-nation euro zone economy contracted by 4.8 percent this year.

Unemployment continued to rise for the 13th month in a row, reaching a 10-year high of 9.2 percent in April.

av/dpa/Reuters/AFP/AP
Editor: