Focus on Trichet's monthly news conference amid worries over Greece
By William L. Watts, MarketWatch
LONDON (MarketWatch) -- The European Central Bank on Thursday left official interest rates unchanged, holding its key lending rate at a record low 1% as it begins to slowly drain hundreds of billions of euros in liquidity from the banking system due to the recovery in the economy and financial markets.
The move was widely anticipated. Attention now turns to ECB President Jean-Claude Trichet's monthly news conference at 2:30 p.m. Frankfurt time, or 8:30 a.m. Eastern.
Trichet last month outlined the ECB's plans for slowly withdrawing liquidity measures. Economists say there's little chance he'll elaborate much further on those plans Thursday.
Economists say Trichet is likely to use the news conference to address concerns surrounding Greece's budget woes and fears that Athens could eventually require some form of bailout.
The Greek government late last year sharply revised up its budget deficit estimate to say the gap would hit 12.7% of gross domestic product, more than three times the limit imposed by the European Union. Greece is expected this month to submit a plan to the European Commission outlining its plan to bring the deficit below the 3% level in three years.
"It is our commitment to leave behind the giant deficits of the past," Greek Prime Minister George Papandreou said Thursday, according to Dow Jones Newswires.
Earlier this month, ECB executive board member Juergen Stark warned that European Union member countries wouldn't bail out Greece. Athens' woes have highlighted concerns about other peripheral euro-zone nations, including Portugal, putting renewed pressure on the euro.
The single currency (CUR_EURUSD 1.45, -.00, -0.08%) , which had traded above $1.50 versus the dollar in early December, traded around $1.42 later in the month before heading back to its current level near $1.45.
While Greece's public finance woes are a source of worry for the ECB, Trichet has likely been comforted by the euro's retreat. A strong euro has raised concerns among European political leaders and business executives, who fear it will derail exports and undercut the euro-zone recovery.
Meanwhile, data released Thursday showed industrial production in the 16-nation euro zone rose 1% in November, exceeding forecasts for a more modest 0.5% monthly rise. Compared to the same month last year, production was down 7.1%, the European Union statistics agency Eurostat reported.
The data offered a further sign that the euro-zone's recovery is "well under way," said Owen James, economist at the Center for Economic and Business Research, a London think tank.
But a strong currency and fiscal tightening across the region are likely to cap the recovery, he said. Indeed, 2009 German gross domestic product data released Wednesday indicated that growth in Europe's largest economy stagnated in the fourth quarter. Read about German 2009 GDP.
"We don't therefore expect any electrifying growth in the euro area for 2010," James said.
Job losses in the euro zone have been smaller than expected given the scale of the economy's downturn, but unemployment still hit an 11-year high in November.
Economists warn that a spike in unemployment is possible later in the year as subsidies supporting shorter working hours run out.
Regarding the ECB's attempts to exit its stimulus efforts, Trichet last month confirmed that December's offer of one-year loans was the last such long-term refinancing operation. He also said a final six-month tender will take place in March. The number of three-month operations has been reduced from two to one per month this year.
"The bank might increase the interest rate on its three-month loans in the not too distant future or return to auctioning funds off at variable rates, but only if market conditions continue to improve," said Jennifer McKeown, senior European economist at Capital Economics. "And either way, it will continue to stress that the economic recovery will be modest, implying that inflation should not be a concern for a very long time."
