European Central Bank: Recovery to be uneven

(AP) — European Central Bank President Jean-Claude Trichet indicated interest rates in the 16-country euro area would not be rising soon amid an uneven economic recovery, and dismissed speculation that Greece might leave the euro over its budget crisis.

At its meeting Thursday in Frankfurt, the bank, which sets policy for single currency zone and its 330 million people, kept its main refinancing rate at a historic low of 1 percent for the eighth month running.

Trichet warned at a news conference afterward that a tentative recovery that started at the end of last year is likely to be "uneven" and that growth would only be "moderate."

He gave few indications interest rates would be going up soon, saying inflationary pressures remained relatively benign and inflation expectations were "firmly anchored" to the ECB's target. Higher rates are central banks' chief weapons against rising prices.

Weak growth — which moderates inflation — takes pressure off the bank to make interest rate increases that could hurt growth in some of the lagging members of the eurozone.

Markets are pricing in a rate increase in the latter part of 2010 but some analysts said the bank may possibly wait until next year. "The bank's cautious tone on the economic outlook supports our view that official interest rates will be on hold for longer than markets expect," said Jennifer McKeown, senior European economist at Capital Economics.

Trichet said he did not comment on "absurd hypotheses" when asked at his news conference about the possibility that Greece could leave or be kicked out of the euro.

Greece is set to report a budget deficit of just under 13 percent of gross domestic product in 2009, way above the 3 percent limit allowed for by euro rules intended to support the shared currency. Its crisis has shocked markets and compelled the Greek government to unveil emergency budgetary measures.

Trichet said Greece and other countries with outsize deficits had to "implement appropriate and bold measures" to get their deficits in line with rules intended to support the euro currency.

He also sought to downplay suggestions that the European Central Bank or the EU should rescue any euro member if they run into difficulty.

Greece, or any other country for that matter, would not get any "special treatment" in bank lending requirements from the bank, said Trichet.

"The the problem is not to get help. The problem is to help oneself," he said. "That is absolutely clear and I think the message is easily understandable."

Trichet said the burden was on the countries themselves to cut deficits in order to comply with the euro rules and to improve their competitiveness — and that belonging to the euro provided members an in-built advantage with dealing with crises, such as easy access to financing and a strong, credible currency.

Earlier, the Greek cabinet approved an economic recovery plan intended to get the budget deficit to below 3 percent by 2012 and to 2 percent by 2013 through spending cuts and a mainly tax-driven boost in state revenues.

"The (EU) asked us to have an alternative plan ready and we complied with this request," said finance minister George Papaconstantinou. "If additional measures are needed to meet our targets, those measures will be taken."

The blueprint is set to be submitted to both the EU and the European Central Bank by Friday.

Trichet said he had not had a chance to assess the Greek government's proposals yet and indicated that the problems facing the country would not affect interest rate policy. Greece, he noted, accounted for only around 2.5 percent of the eurozone's total economic output.

Setting policy for all 16 countries will not be easy, especially with big discrepancies in unemployment and growth among euro countries, but Trichet said that's nothing new — the ECB has had to do that since the euro was launched in 1999.

"Not only do they need to get the timing right but they will also find it difficult to align their monetary policy to the diverging economic prospects among the euro members," said Jorg Radeke, economist at the Centre for Economic and Business Research in London.

German Chancellor Angela Merkel said Wednesday that difficult times lay ahead for the euro given the divergent economic situations across the continent but said it would not be right for Germany to impose changes on Greece

"Who will tell the Greek parliament that it needs to reform its pension system? I'm not sure if they would be so thrilled to hear this from Germany. I don't think the German parliament would be if Greece would do that to us," Merkel said.

"Consequently, the euro will be in a very difficult phase next year," she added.

The European Central Bank is tasked with keeping inflation at close to, but below, 2 percent. In the year to December, official figures showed that inflation indeed remained subdued at an annual rate of 0.9 percent.

As well as slashing borrowing costs during the financial crisis from 4.25 percent, the bank also introduced a raft of extraordinary measures to keep credit flowing to banks and to prevent inflation from turning sharply negative.

Last month, it set the course to withdraw these measures and Trichet said further announcements could be made in March.