Interest rates in Europe are expected to remain on hold for the long term as a result of uneven and low inflation, according to the latest report from the European Central Bank. Last week the ECB kept eurozone interest rates on hold at 1% for the eighth consecutive month and despite positive data showing industrial production is growing at twice the expected rate, president Jean-Claude Trichet defended the decision saying Europe’s economic recovery is likely to be patchy.
‘The Governing Council expects the euro area economy to grow at a moderate pace in 2010, recognising that the recovery process is likely to be uneven and that the outlook remains subject to uncertainty,’ Trichet said. “The latest information has also confirmed that, towards the end of 2009, euro area economic activity continued to expand. However, some of the factors supporting the growth in real GDP are of a temporary nature,’ he added.
Economists feel that rates are unlikely to increase while eurozone inflation remains below the ECB’s target of 2%. Although the rate of price rises in the 16 country eurozone rose to 0.9% in December 2009 from 0.5% the previous month, inflation in 2009 still averaged just 0.3%. The euro zone as a whole emerged from recession in the third quarter after experiencing positive growth, the bank said. However, questions have been raised over the recovery of the euro zone, in particular Greece’s deteriorating fiscal situation.
Greece, which is the euro zone’s weakest economy, has the highest debt of the 16 member block. The Greeks ran up a budget deficit of 12.5% of GDP last year, while eurozone prohibits budget deficits in excess of 3% of GDP. Currently, its public debt stands at €300 billion. Germany’s Chancellor Angela Merkel has said that Greece’s escalating budget deficit may send the Euro into a ‘very difficult phase’. Alan Ruskin, head of currency strategy at Royal Bank of Scotland Group, said that there’s definitely concern around the eure periphery in general. ‘The euro has this overhang from Greece which is still making headlines,’ he commented.
Trichet also signaled that officials will wait for further signs of an economic recovery before withdrawing emergency stimulus measures completely and switching towards a tightening bias. Trichet said though that any talk of Greece leaving the euro was ‘absurd’.