Frankfurt - The European Central Bank (ECB) left interest rates on hold Thursday at their historic low of 1 per cent, but raised its growth and inflation forecasts for the 16-member eurozone amid signs that the recession is drawing to an end. Up until now, the ECB has been projecting negative growth in the currency bloc through to the middle of 2010.
Outlining the bank's staff projections at a press conference, ECB chief Jean-Claude Trichet said the bank expects the eurozone to contract by 3.5 per cent. However, it had previously expected a contraction of 4.6 per cent this year.
"The significant contraction has come to an end," said Trichet, noting that this is likely to be followed by a period of stabilization and "a very gradual recovery."
However, Trichet said the bank remained cautious about the economic outlook, warning that the recovery would be likely be "uneven" and that the economic environment remained uncertain.
After a slump of consumer prices into negative territory, Trichet said the ECB believed that inflation should become positive in the coming months.
Inflation should come in between 0.2 and 0.6 per cent this year and between 0.8 and 1.6 per cent in 2010.
Analysts believe the prospects of only tepid economic growth emerging in the coming months and languid inflationary pressures means that borrowing costs in the eurozone will remain at their current levels, possibly through to the middle of 2010 or even later.
Set out in the bank's staff projections, the new growth forecasts follow the release of figures Wednesday by the European Union's statistics office, Eurostat, confirming that the eurozone's two biggest economies - Germany and France - climbed out of recession in the second quarter.
This, in turn, prompted forecasts that the eurozone could exit recession in the third quarter after narrowly missing out on doing so in the three months to the end of the June.
The eurozone contracted by 0.1 per cent in the second quarter after slumping by 2.5 per cent in the first three months of the year.
In an optimistic report on the world economic outlook, the Paris- based Organization for Economic Co-Operation and Development said it expects the eurozone would grow by 0.3 per cent in the third quarter.
The OCED said it now expects the recession to come to an end faster than previously than predicted.
