Trichet Sees Bumpy Recovery, Signals No Rush to Exit
European Central Bank President Jean-Claude Trichet said the euro region’s recovery from recession will be “bumpy” and signaled officials are in no rush to withdraw emergency stimulus measures.
While latest data suggest “the significant contraction in economic activity has come to an end,” the recovery “is expected to be rather uneven,” Trichet said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at a record low of 1 percent. “It isn’t time to exit” policies designed to boost growth, he said.
The ECB is wary of nipping the euro-region recovery in the bud by tightening policy too soon as rising unemployment and the expiry of government rescue packages may damp expansion next year. The bank today raised its forecast for economic growth. At the same time, Trichet said the ECB won’t increase the rate it charges banks on 12-month funds at its next tender, which should “promote the extension of credit to the euro-area economy and, therefore, further underpin its recovery.”
“The key message from today’s decision is that rates are on hold for an extended period, and that the ECB is in no hurry to remove the monetary stimulus that it has put in place,” said Colin Ellis, an economist at Daiwa Securities SMBC in London. “Trichet sought to play down any prospect of a swift economic recovery.”
The euro fell almost a cent after Trichet’s comments to $1.4245.
‘Bumpy Road’
In the U.S., the Federal Reserve signaled in minutes published yesterday that it’s already trying to prepare investors for an end to some of its asset purchases.
Trichet will discuss exit strategies and prospects for the global economy when he meets with officials from the Group of 20 nations in London from tomorrow.
“Uncertainty is very high,” Trichet said. “It’s a bumpy road we have ahead of us. Prudence and caution are still of the essence.”
The ECB today raised its economic forecasts for the 16- nation euro region to predict growth of about 0.2 in 2010 instead of a 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months ago.
The ECB expects inflation to average 0.4 percent this year and 1.2 percent in 2010, up from 0.3 percent and 1 percent forecast in June. That is still below the bank’s goal of keeping annual price gains just below 2 percent.
‘Subdued’ Inflation
Euro-region consumer prices have posted annual declines for three straight months. Trichet said while “inflation rates are projected to return to positive territory again within the coming months,” price developments will “remain subdued” amid “ongoing sluggish demand.”
With a global recovery bolstering demand for European exports, economists nevertheless predict the economy will expand this quarter. European economic confidence increased twice as much as economists forecast in August, and the region’s manufacturing and service industries almost ceased contracting.
L’Oreal SA, the world’s largest cosmetics maker, said on Aug. 27 that sales improved in July and will keep recuperating gradually in the second half of the year. Voestalpine AG, Austria’s biggest steel company, said on Aug. 28 it’s ending shortened working hours for staff at its Linz plant after demand for flat steel rebounded “significantly.”
“The green shoots have to be seen in a relative context,” ECB Executive Board member Juergen Stark told a conference in Frankfurt today. “Still, there are signs that we’re moving past the low point. The free-fall of economic activity seems to be stopped and for 2010 we can expect a gradual recovery.”