European Central Bank president says falling consumer prices in eurozone will not last

The European Central Bank governing council met in Luxembourg Thursday for one of two annual meetings held outside of its base in Frankfurt.

The ECB announced it will keep interest rates at a record low of 1.0 percent, in line with analysts' forecasts. Other key rates - the marginal lending rate currently at 1.75 percent and the deposit rate at 0.25 percent - will also remain unchanged.

The 16-member eurozone has been hit hard by the worst global recession in over six decades. Data released before the conference show unemployment rising, while inflation has fallen to below zero for the first time in the currency bloc's history. Consumer prices also dropped for the first time in June by 0.1 percent compared to a year ago, according to the European Union's statistics office.

However, European Central Bank president Jean-Claude Trichet stressed that falling consumer prices wouldn't last. "We expect the current episode of extremely low or negative inflation rates to be short lived," he said at a press conference. Analysts say that some recent data show signs of economic recovery.

The ECB has taken a number of drastic measures to try to combat the recession. Trichet discussed plans to buy 60 billion euros ($84 billion) worth of company bonds starting July 6th.

"The hope is that the ECB liquidity boost will translate into additional lending to the broader economy, though there is no guarantee that this will happen," Daniele Antonucci of Capital Economics told AFP.

A week prior to their Luxembourg meeting, the ECB gave out a record number of loans to banks totaling 442 billion euros ($626 billion) for a year at 1.0 percent.  It was the bank's first 12-month refinancing operation and involved the highest number of commercial banks ever at 1,100. The threat of deflation is now a chief concern.

On Thursday the cost of three-month euro loans to banks, known as the European Interbank Offered Rate, or Euribor, dropped to another record low.

Despite small signs of improvement, the future of Europe's economy is still uncertain. As ING economist Carsten Brzeski remarked, "a wait-and-see game has now begun."

vj/afp/dpa/ap/reuters
Editor: Michael Lawton