(BN) Trichet Says Current ECB Interest Rates ‘Appropriate’ (Update1)

By Jana Randow and Gabi Thesing
July 2 (Bloomberg) -- European Central Bank President Jean-Claude Trichet signaled the ECB has no immediate plans to cut interest rates again and said the euro region’s economy will start to recover in the middle of 2010.
"The current rates are appropriate," Trichet said at a press conference in Luxembourg after the ECB left its benchmark rate at a record low of 1 percent. "After a phase of stabilization, a phase of recovery is expected around mid-
2010." Inflation pressures will be "dampened," he said.
The ECB has reduced its main rate by 325 basis points since October to fight Europe’s worst recession since World War II.
The Frankfurt-based central bank also flooded the banking system with hundreds of billions of euros last week and will start buying 60 billion euros ($84 billion) of covered bonds on July 6 to free credit and encourage lending.
"Economic activity is likely to remain weak but should decline less strongly than was the case in the first quarter," Trichet said. Last week’s operation "is expected to strengthen further the liquidity position of banks and to support the normalization of money markets."
The euro was little changed after Trichet’s comments and traded at $1.4030 at 3 p.m. in Luxembourg.
The ECB may keep its benchmark rate at the current level until the fourth quarter of 2010, a Bloomberg survey of
economist showed before the decision. Trichet said today’s decision by the 22-member Governing Council was unanimous and
refused to rule out further reductions if necessary.

Recession

There are signs that the worst of the recession may be over. The contraction in Europe’s services and manufacturing
industries is slowing and confidence in the economic outlook rose to a seven-month high in June.
Still, the ECB predicts the euro-region economy will contract about 4.6 percent this year and 0.3 percent next.
Unemployment will rise to 11.5 percent in 2010, the European Commission forecast on May 4. The jobless rate was 9.5 percent in May.
Trichet also said the ECB will make sure that recent stimulus measures don’t boost inflation.
"Once the macroeconomic environment improves, the Governing Council will ensure that the measures taken are
quickly unwound and that the liquidity provided is absorbed," he said. "Hence, any threat to price stability over the medium to longer term can be effectively countered in a timely fashion."

I was talking with a senior economist at the IIF, he told me he was at a meeting in beijing where one of the guys on the ECB was arguing that deflation was a good thing for the Eurozone! Can you believe that!!?? completely opposite to the curreny US Fed's actions.

His arguement was somethign along the lines of deflation will lead to real income increases which will be spent in the economy. Talk about going backwards in history! This type of arguement was seen in the 1930's!!!

Instead of trickle down government spending effects (as the US policy is trying to do), its like reverse where they hope to jumpstart the economy from below.