ECB rates firmly on hold, Trichet sees uneven recovery

Outside view shows the Euro sculpture in front of the headquarters of the European Central Bank (ECB) in Frankfurt in this September 2008 file photo.

FRANKFURT (Reuters) - The European Central Bank kept benchmark interest rates unchanged at a record low of 1.0 percent on Thursday and its president said economic recovery in the euro zone would be moderate and uneven.

All 80 economists in a recent Reuters poll had expected rates to remain on hold for the eighth month in a row and all but a handful see the central bank keeping them there well into the second half of the year as it waits for the recovery to firm.

Markets were little changed after the decision.

"The Governing Council expects the euro area economy to grow at a moderate pace in 2010, recognizing that the recovery process is likely to be uneven and that the outlook remains subject to uncertainty," ECB President Jean-Claude Trichet told a news conference to explain the central bank's decision.

He expected low inflationary pressure over the medium-term.

"The latest information has also confirmed that, towards the end of '09, euro area economic activity continued to expand," Trichet said. "However, some of the factors supporting the growth in real GDP are of a temporary nature."

Recent data showed the mood surrounding the economy improved more than expected in December, but unemployment jumped above 10 percent, retail sales disappointed and money supply shrank for the first time on record.

HOLDING PATTERN

Goldman Sachs economist Dirk Schumacher said despite the data hiccups, there was "no reason for a change of rhetoric or tone from the ECB".

Trichet gave little new information on the ECB's plan to wean the banking sector off its support measures.

Last month, the ECB started reeling in its crisis support measures -- mainly unlimited, ultra-cheap loans to banks, which have pushed bank-to-bank lending costs to record lows.

"The Governing Council will also continue to implement the gradual phasing out of the extraordinary liquidity measures that are not needed to the same extent as in the past," he said.

Greece's deteriorating fiscal situation is one of many bumps on the recovery horizon, with recent mixed data also highlighting the need for policymakers to be careful in removing the financial crutches.

Greece announced key targets of a three-year plan to shore up its public finances on Thursday, following visits by ECB and European Commission officials last week and ahead of the release of an EU review of Greece's stability program.

Trichet said questions about Greece exiting the euro zone were "absurd".

Regarding growth in the 16-nation currency bloc as a whole, Trichet said the effects of extraordinary state stimulus, following the financial crisis, could push it higher than expected.

"Confidence may also improve further and the global economy, as well as foreign trade, may recover more strongly than projected," he said.

Among the downside risks, he listed renewed increases in oil and other commodity prices, possible protectionist pressures and the chance of market volatility related to the correction of global imbalances.

For graph of lending to euro zone households and corporates click

here

For graph of euro zone unemployment click

here

For graph of ECB lending to banks click

here

(Reporting by Marc Jones; editing by Mike Peacock)

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