The eurozone economy has not yet stabilized, but the European Central Bank kept its key lending rate at 1.0% as expected, the highest among large economies.
Looking ahead the ECB expects the eurozone economy to eventually stabilize and then begin a gradual recovery, with positive quarterly growth rates expected by mid-2010.
Available indicators of inflation expectations over the medium-to-longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term.
ECB President Jean-Claude Trichet said that the negative rate of inflation was expected and is forecast to hold below zero over the coming months. Though inflation in the minus column should be temporary, Trichet anticipates inflation will “remain dampened over the policy-relevant horizon.”
The ECB stubbornly resisted any movement on rates through the first half of 2008 and even tightened last July. Central bankers across the pond finally began cutting rates after it was clear that the housing crisis in the US threatened to sink the eurozone economy.
Still, Trichet and Company need to do more and another reduction in interest rates as well as an expansion in bond purchases are needed. A rise in the jobless rate to 9.5%, a ten-year high, is the latest sign of economic weakness.
Banks in Europe have enough capital to withstand losses through the end of the year and into 2010 as long as Europe experiences a strong recovery. And Trichet encouraged new efforts to raise capital.
But an ECB financial stability expert warned last month that banks could see rising problems and new defaults in the event of a gradual recovery. And that is exactly what policymakers are forecasting. See ECB expert issues warning.
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