The verdict is out; the European Central Bank held their benchmark rates steady at 1.00%, a historic low; as policy makers believe that the current rates are the most suitable at the time being. Attention will remain concentrated towards the approved 60 billion euro’s, where the purchases of the long-term bonds will start taking place on July 9, 2009.

The governing council had reduced the benchmark down by 325 basis points, from the highest seen at 4.25% in July 2008; to currently perceive rates at 1.00%. The first rate cut seen in the euro area was on October, at the time the Credit Crisis intensified after the failure of Lehman Brothers; Freddie Mac, and Fannie Mai. The turbulence resulted after the failure of such major corporations, deteriorated all the confidence in the world markets, which made six central banks work together in a joint committee to deduct 50 basis points from benchmarks.

The sequence of rate reductions continued in an attempt to inject more liquidity in financial markets, as economies contractions continued to deepen further within the euro; especially, in the manufacturing and services sectors which had hit rock bottom. Nevertheless, the European Central Bank had used calm and slow reductions in order not to lose the effect of using the most important instrument owned by central banks.

Therefore, the European Central Bank had dissented with other rivals, from taking their benchmark down near to zero, like the United States and the United Kingdom; as they currently struggle with current low levels, having no other instruments to use other than extending their measures.

However, as pressures increased and deflationary threats augmented in the sixteen nations, with consumer prices plummeting from elevated levels to hit the zero barriers in May, projections continue to clear up that negative levels, will persist for some time, this week we’ve seen the June flash estimate fall down to -0.1%, the lowest on record. Those pushed the ECB, two months ago, to approve the use of 60 billion euro’s to purchase long-term euro bonds from primary and secondary markets. After deep negotiations, the committee reached to 60 billion limiting it down from the previously mentioned 125 billion euro’s.

Trichet mentioned in his speech today that he sees keeping the interest rate at 1%, is enough to support the economy and was not astonished that inflation rate is below zero, as it was expected and referred to by Trichet in his previous reports; when he anticipated negative figures, temporarily. The European economy started to show signs of improvement, and that the contraction in the second quarter will be lower than the one that hit the economy in the first quarter. Thus, a decline in contraction and stability are expected to take in the coming period.  

The ECB expects the interest rate to remain low but under control on the medium term. With regard to the economy status, he mentioned that the dangerous phase has gone, and the stimulus packages managed to lower the adverse impacts of the economic stagnation; the thing that boosted confidence more than estimations.

However, Trichet mentioned that there are some risks surrounding the economy such as the incline in oil prices that started from the second quarter of the current year as its price reached $73 a barrel. This surge in oil price, may cause an increase in the general price level in the economy to an extent that may threaten the sustainability of the monetary and fiscal policies adopted by the ECB. 

The effect of the slash in interest rate will supposedly show its positive impact on growth and the supporting financial sector. Nevertheless, banks should protect themselves through raising its capital. The World Bank predicts that assets would depreciate with $4.1 trillion, where the crisis till now has resulted in $1.5 trillion. Thus, banks in Europe and worldwide should maintain the adequate amount of capital, to face any future circumstances that may occur. 

Moreover, he expects that stability and returning back to growth won't be witnessed before 2010; whereas, the real advance may e reached by mid 2010. Thus, analysts expect the interest rate to remain at this low level. The ECB will follow markets to see if there is any change that is happening, and require instant interventions. However, the economy won't come back to its original status before 2011, with no improvements in 2010, as the World Bank expects.

The loans that the ECB previously provided to the financial sector, in the form of 12 months loans, may have a positive impact, but the bank also was pleased with these loans and it did not make any decisions concerning the spread on these loans. All in all, the ECB refuses to be too optimistic as the economy is still vulnerable and fragile, but it doesn't want to intervene by cutting the interest rate even further; as the financial markets are going to set the apt interest rate.

The steps taken by the bank till now are capable of bringing back the economy on the right track; despite the incline in overnight deposits, which was expected by the ECB. The bank will start purchasing 3-10 years maturity bonds on July 6, which are supported by euro. However, Trichet did not reveal details for the plan.