ECB leaves benchmark interest rate unchanged as economy picks up

The cost of borrowing from Maltese banks is expected to remain low as the European Central Bank yesterday decided to leave its benchmark interest rate at one per cent despite signs that the EU’s economy is in recovery.

Notwithstanding low inflation and encouraging economic growth prospects for the next two years, the ECB’s governing board, which met in Frankfurt yesterday, decided to keep to its recent monetary policy in order to try to stimulate further the EU economy.

The ECB said although growth had picked up in recent months, eurozone inflation, at 1.6 per cent in August, remained in line with its target of an annual rate “below but close” to two per cent.

ECB president Jean-Claude Trichet said eurozone growth this year would be revised upwards, although he insisted on caution as the economic situation in the EU was still very fluid.

After a period of sharp decline, euro area economic activity had been expanding since mid-2009 and future prospects looked positive, he said.

“Euro area real GDP grew strongly on a quarterly basis, increasing by one per cent in the second quarter of 2010, supported by ongoing growth at the global level but also in part reflecting temporary domestic factors. Recent data and survey evidence generally confirm the expectation of moderation in the second half of this year, both at the global level and in the euro area,” Mr Trichet said.

“Annual real GDP growth will range between 1.4 and 1.8 per cent in 2010 and between 0.5 and 2.3 per cent in 2011. Compared with the June 2010 projections, 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. For 2011, the range has also been revised upwards, reflecting mainly carry-over effects from the projected stronger growth towards the end of 2010.”

In spite of these positive data, the board of governors, including Malta’s Michael Bonello, decided to “leave things as they are”. However, the ECB president said the Bank would be reviewing its policy of matching in full eurozone banks’ demand for liquidity on a weekly, monthly and three-monthly basis.

The move reflects continuing uncertainty about the strength of the economic recovery and the vulnerability of banks in eurozone “peripheral” countries such as Spain, Ireland and Greece, where demand for ECB liquidity has been strongest.

Mr Trichet said it was essential to remain “cautious and prudent” about the strength of the EU’s economic recovery.