EUROPEAN CENTRAL Bank (ECB) president Jean-Claude Trichet said the euro zone’s recovery from recession will be “bumpy” and he signalled officials are in no rush to withdraw emergency stimulus measures.
While latest data suggest “the significant contraction in economic activity has come to an end, the recovery is expected to be rather uneven”, Mr Trichet said yesterday in Frankfurt after the ECB kept its benchmark interest rate at a record low of 1 per cent. “It isn’t time to exit policies designed to boost growth,” he said.
The ECB is wary of nipping the euro-zone recovery in the bud by tightening policy too soon as rising unemployment and the expiry of government rescue packages may depress expansion next year. The bank yesterday raised its forecast for economic growth.
At the same time, Mr Trichet said the ECB would not increase the rate it charges banks on 12-month funds at its next tender, which should “promote the extension of credit to the euro-area economy and, therefore, further underpin its recovery”.
The key message from yesterday’s decision is that rates are on hold for an extended period, and that the ECB is in no hurry to remove the monetary stimulus that it has put in place, according to Colin Ellis, an economist at Daiwa Securities SMBC in London.
Mr Trichet sought to play down any prospect of a swift economic recovery. The euro fell almost a cent to $1.4245 after Trichet’s comments.
In the US, the Federal Reserve signalled in minutes published yesterday that it is already trying to prepare investors for an end to some of its asset purchases. Mr Trichet will discuss exit strategies and prospects for the global economy when he meets with officials from the Group of 20 nations in London from today. Uncertainty is very high, Mr Trichet said. “It’s a bumpy road we have ahead of us. Prudence and caution are still of the essence.”
The ECB raised its economic forecasts for the 16-nation euro region, to predict growth of about 0.2 per cent in 2010 instead of a 0.3 per cent contraction. In 2009, the economy is expected to shrink about 4.1 per cent, less than the 4.6 per cent contraction predicted three months ago.
The ECB expects inflation to average 0.4 per cent this year and 1.2 per cent in 2010, up from 0.3 per cent and 1 per cent forecast in June. That is still below the bank’s goal of keeping annual price gains just below 2 per cent. Euro zone consumer prices have posted annual declines for three straight months.
Mr Trichet said that while inflation rates are projected to return to positive territory again within the coming months, price developments will remain subdued amid ongoing sluggish demand.
With a global recovery bolstering demand for European exports, economists nevertheless predict the economy will expand this quarter. European economic confidence increased twice as much as economists forecast in August, and the region’s manufacturing and service industries almost ceased contracting.
L'Oreal, the world's largest cosmetics maker, said sales improved in July and will keep recuperating gradually in the second half of this year. – (Bloomberg)
