Trichet: Too early to 'declare victory' over crisis

02.09.10 @ 17:42

  1. By Matej Hruska

Despite raising its GDP expectation for this and next year, the European Central Bank decided at its meeting on Thursday (2 September) to keep the benchmark interest rate at one percent for the 16th consecutive month and to continue with unlimited lending until the end of the year.

  • Uncertainty still prevails in the eurozone, ECB president Jean-Claude Trichet said Thursday (Photo: Swedish Presidency)

The ECB raised its growth forecast for 2010 and 2011 after a better than expected second quarter performance from the euro area. The EU's statistical office reported on Thursday in its first estimate that GDP went up by 1.0 percent in both the 16-nation euro area and the EU27 in the second quarter of 2010.

According to the updated ECB estimates, annual real GDP growth will range between 1.4 percent and 1.8 percent in 2010 and between 0.5 percent and 2.3 percent in 2011. A June forecast estimated GDP would rise 1 percent this year and 1.2 percent in 2011.

Despite the positive GDP growth expectations, the ECB will keep offering banks unlimited one-week and one-month loans to raise their liquidity until at least 18 January 2011. Previously, the ECB had committed to lend banks unlimited cash until at least mid-October.

"Looking ahead, the recovery should proceed at a moderate pace with uncertainty still prevailing," ECB President Jean-Claude Trichet told reporters at during a news conference in Frankfurt.

"We have to remain cautious and prudent - we don't declare victory," he said, adding that "monetary policy will do all that is needed to maintain price stability in the euro area over the medium term."

"The decision to extend full allotment to liquidity operations until the beginning of next year is welcome as tensions remain in the banking sector," Marie Diron, Chief Economist for the Ernst & Young Eurozone Forecast, wrote in a note to clients, quoted by the Wall Street Journal.

"Many banks continue to face difficult access to funds, which leads to tight credit conditions for the real economy," Ms Diron added.

According to Carsten Brzeski, senior economist with ING bank in Brussels, it is mainly banks at the eurozone's periphery that depend on low ECB interest rates and unlimited lending.

"On the one hand, stress tests in July showed banks in core eurozone countries are in rather good shape and may not really need it, but banks from southern Europe rely on money from the ECB," he told this website.

Core countries are also showing a trend toward more sustainable economic development, Mr Brzeski said, while southern states still need to reform their banking systems and economies. However, neither the eurozone nor the US should face double-dip recession in the coming year.