ECB sees Euro zone recovery by mid-2010

The European Central Bank (ECB) considers that the worst of the global financial crisis is over and expects the euro zone economies to embark on a recovery path by mid-2010.

The bank kept the benchmark interest rates unchanged yesterday at a record low level of 1 per cent.

ECB president Jean-Claude Trichet said in a press conference in Frankfurt that the interest rates are ''appropriate'' further adding that the bank has decided on the purchase of €60 billion ($85 billion) worth covered bonds – low risk securities – from both primary and secondary markets. 

''Following two quarters of very negative growth, economic activity over the remainder of this year is expected to decline at much less negative rates. After a stabilisation phase, positive quarterly growth rates are expected by mid-2010." Trichet said.

The first quarter GDP contraction for the 16-nation euro zone was 2.5 per cent, and on year-on-year the drop was 4.8 per cent.

However, it is felt that the Europe's manufacturing and service sectors are showing some signs of revival and improvement in business sentiment.

Analysts consider the interest rates might not have bottomed out and there is further room for cuts in the future lest the crisis deepens. Since last October, ECB resorted to a series of rate cuts from 4.25 per cent.

The bank said that the current economic downturn for the zone was sharper than the earlier forecasts. The economy is projected to shrink on an average 4.6 per cent in 2009 compared to previous estimate of 2.7 per cent. The latest IMF and European Commission projections show a contraction of 4.2 per cent and 4-per cent, respectively.

The ECB sees stabilisation of the economy in 2010 with estimated growth of -0.3 per cent which is close to the March forecast of a midpoint of zero.

The inflation is seen considerably lower than the 2 per cent limit set by the ECB for both 2009 and 2010. The projection for 2009 is, on an average, 0.3 per cent and for the next year it is expected to be around 1-per cent. The inflation registered for May is a record low of zero. ECB is comfortable with an inflation value of less than but close to 2 per cent.

Nevertheless, the labour market could deteriorate further, Trichet told.

Britain's central bank – Bank of England – also kept the key lending rates unchanged yesterday at a record low of 0.5 per cent and plans to buy government and corporate bonds worth £125 billion ($200 billion).

On Thursday's trade the euro fell 0.2 per cent to $1.4122 following the ECB's decision to hold the interest rates.

Appreciating the US government's support on strong dollar, Trichet said: "I would say it's very important and we appreciate enormously that the US authorities are repeating that a strong dollar is in the interests of the United States of America, which has been repeated by the Secretary of the US treasury recently."

Market analysts feel that the ECB decision was not a surprise and expect the market to remain positive in the coming months.

Major European stock exchange indices were closed higher yesterday; CAC (France) was up 0.8 per cent,  DAX (Germany) rose 0.7 per cent and  FTSE100 (UK) 0.1 per cent.