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LUXEMBOURG: The European Central Bank kept its main interest rate steady at a record low of 1.0 percent on Thursday as ECB chief Jean-Claude Trichet downplayed a threat of deflation gutting the eurozone.
The ECB expects "the current episode of extremely low or negative inflation rates to be short-lived," Trichet told a press conference two days after an EU estimate said eurozone consumer prices had fallen for the first time in June.
Economists are concerned the 16-nation bloc's economy will struggle to recover from recession if consumer prices fall broadly over a sustained period.
That encourages households to postpone purchases in expectation of still lower prices, undermines production and threatens job numbers that are now starting to contract sharply in countries like Ireland and Spain.
Trichet repeated an ECB estimate that the eurozone should begin to see a gradual recovery of economic growth by mid-2010, while leaving the door open to another interest rate cut.
He said the governing council's decision to leave rates unchanged, which was unanimous, did not mean "this was the lowest level we would ever attain under any circumstances."
ING economist Carsten Brzeski commented that after a rate cut in May, the presentation of unconventional measures in June and a massive loan operation last week, "the ECB has now released the accelerator and switched to cruise control."
In Sweden, which is not a eurozone member, central bank officials cut their key interest rate to a record low of 0.25 percent Thursday to boost that country's flagging economy.
But in Iceland, the central bank held its key rate at 12 percent following four cuts in the last three months.
The ECB wants to see what will emerge from its unorthodox plan to buy low-risk corporate bonds and record loans to commercial banks last week that were meant to boost credit to the economy as a whole.
With the economy floundering, the ECB launched an enormous life raft, lending banks 442 billion euros (626 billion dollars) for a year at 1.0 percent.
It was the central bank's first 12-month refinancing operation and drew an all-time high of more than 1,100 commercial banks.
Trichet told reporters: "We were happy with the result of this liquidity supply.
"The amplitude of this operation is in our eyes the proof of the pertinence of this channel for our enhanced credit supply," he added in reference to an ECB focus on keeping banks at the centre of its monetary policies.
But the ECB chief stressed the exceptional measures must "be accompanied" by an appropriate "joint effort" from commercial banks.
Trichet said he and the ECB governors "have not envisaged any new measures or operations" to spur economic activity.
With economic data and surveys suggesting the eurozone's economic freefall has slowed in recent months, "the ECB clearly believes that it can afford to stand back in the near term at least and monitor what impact its various policy moves are having," IHS Global Insight economist Howard Archer said.
Brzeski added that "despite the parallels with Japan in the 1990s, the ECB still appears not concerned with deflation at all.
"The D-word is being avoided."
Finally, the ECB said it would ensure that its extraordinary measures "are quickly unwound and that the liquidity provided is absorbed" as soon as the economic climate improved.
It urged eurozone governments to do likewise, saying they "should prepare and communicate ambitious and realistic fiscal exit and consolidation strategies" after approving massive stimulus packages to combat the worst global recession in six decades. - AFP/de
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