The European Central Bank (ECB) decided on Thursday to keep its benchmark interest rate unchanged at the record low level of 1 percent.

Wait and see

"On the basis of its regular economic and monetary analyses, the governing council (of the ECB) decided to leave the key ECB interest rates unchanged," ECB president Jean-Claude Trichet said at a press conference.

The decision, taken by the governing council of the ECB in Luxembourg, is in line with the broad expectation of economists, who had said the ECB would adopt a wait-and-see attitude before the effect of its massive infusion of credit into the banking system last week becomes clear.

In an unprecedented move to shore up confidence in the financial sector and revive the recession-hit economy, the ECB lent 442 billion euros (623 billion U.S. dollar) in one-year cheap loans to eurozone banks at an auction last Wednesday.

It was the first one-year operation taken by the ECB and marked the bank's biggest-ever liquidity injection.

"This operation at a fixed interest rate of 1 percent is expected to strengthen further the liquidity position of banks and to support the normalization of money markets and the extension of credit to the economy alongside the other measures of enhanced credit support," Trichet said.

The ECB has put its rate cut on hold since June, before which the bank had lowered interest rates by a total of three and a quarter percentage points since early October 2008.

Analysts are expecting the ECB to keep its main interest rate unchanged well into 2010 as the eurozone economy is showing some tentative signs of improvement.

Recovery expected by mid-2010

Noting that the current rate remains appropriate, Trichet said that the combined economy of the 16 European Union (EU) nations that use the euro is likely to make a rebound by mid-2010.

"Economic activity over the remainder of this year is expected to remain weak but should decline less strongly than was the case in the first quarter of 2009," he said, "Looking ahead into next year, after a phase of stabilization, a gradual recovery with positive quarterly growth rates is expected by mid-2010."

Hours before the ECB's rate decision, official figures released by the EU's statistics office Eurostat showed that the unemployment rate in the eurozone hit a 10-year high in May, reflecting the current economic woes.

Trichet identified increasingly unfavorable labor markets as one of the risks to the economic outlook, but he said the risks were balanced.

On the positive side, there may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus being provided and from other policy measures taken, Trichet said, adding confidence may also improve more quickly than currently expected.

On the other hand, concerns remain relating to a stronger or more protracted negative feedback loop between the real economy and the turmoil in financial markets, further increases in oil and other commodity prices, the intensification of protectionist pressures, increasingly unfavorable labor markets, and adverse developments in the world economy stemming from a disorderly correction of global imbalances.

No risk of deflation

The ECB usually meets in Frankfurt, Germany but has two meetings a year in capitals of other eurozone countries.

This month's meeting was held amid increasing fears of deflation in the eurozone after preliminary figures from Eurostat showed that the zone's annual inflation dropped into negative territory for the first time on record in June, standing at minus 0.1 percent.

Trichet said this development reflects primarily base effects resulting from past sharp swings in global commodity prices, warning that further decline in annual rates of inflation was anticipated.

But the ECB chief downplayed the risk of deflation in the eurozone, insisting the negative inflation rate would be temporary.

"Owing to these base effects, annual inflation rates are projected to remain temporarily in negative territory over the coming months, before turning positive again. Such short-term movements are not relevant from a monetary policy perspective," he said.

Trichet said eurozone inflation is expected to remain in positive territory in the medium and long term, while price and cost developments are expected to remain dampened in wake of the ongoing sluggish demand in the eurozone and elsewhere.

"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 percent over the medium term," he said, adding that risks to the outlook for inflation are broadly balanced.

(Xinhua News Agency July 3, 2009)