The European Central Bank held interest rates at a record low today 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 18th. It will also offer unlimited funds at its three-month tenders until at least the end of this year.
Analysts also expec 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 1 per cent today.
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," Mr 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.
Mr 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 to 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 to 1.7 per cent in 2010 and 1.2 to2.2 percent 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," Mr 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.
Turnover in overnight money markets fell back in August after doubling in July to more than €1 trillion and many banks still prefer to deposit excess funds back at the ECB rather than lending them on to counterparts.
Banks also face a liquidity cliff at the end of September when they must repay a total of €225 billion euros in 12-, six- and three-month funds or roll it into shorter maturities.