Unchanged interest rates defended by ECB chief

As the European Central Bank last week decided to keep interest rates in the eurozone at their current levels, the President of the European Central Bank Jean Claude Trichet defended the bank's decision describing it as "appropriate".

Following the monthly meeting of Eurozone Central Bank presidents, including Michael Bonello, Malta's Central Bank Governor, the interest rate on the main refinancing operations remained at just one per cent and rates on the marginal lending facility and the deposit facility remained at 1.75 per cent and 0.25 per cent respectively. This is the third consecutive time that rates have remained unchanged. At the same time, the decision was welcomed by market actors who don't expect changes over the next year. Mr Trichet said that the current rates were "appropriate" and risks to growth and inflation were in the right balance. He also ruled out any risk of deflation in the Eurozone.

Inflation in the 16-member euro area continued to fall in July (to -0.6 per cent as opposed to -0.1 per cent in June) but this new fall in prices reflects primarily base effects resulting from the peaks observed in global commodity prices a year ago.

Mr Trichet insisted that this fall in the general price index will be "temporary" and said that he expects a return to positive inflation rates in the second half of the year.

Although economic activity is expected to be weak for the rest of the year, the pace of contraction is clearly slowing down, explained Mr Trichet. However, he refused to make any definitive conclusion on the matter and said that clearer indications are expected to be available at the end of the next board of governors' meeting on rates in September when new forecasts of the ECB's services will be published.

The euro has been at its lowest level since its launch 10 years ago but the one per cent interest rate is, however, the highest of all major developed countries.

Last week, the Bank of England also announced that it was keeping its main rate to 0.5 per cent, a historical low level. The US Federal Reserve main lending rate is within a 0 to 0.25 per cent and the exchange rate on a daily basis at the Bank of Japan is practically zero.

Mr Trichet said that monetary policy effects are beginning to be felt and measures will gradually have an effect. He called on the banks to fully act on the decisions made.