Financial Schools Reviews

() - Growth prospects for the Eurozone economy in the second quarter have strengthened and the third quarter is likely to be better than expected, European Central Bank President Jean-Claude Trichet said Thursday. But, he noted that the second half of this year is unlikely to be as buoyant as the second quarter, which he described as highly exceptional.

“The available economic data and survey-based indicators suggest a strengthening in economic activity in the second quarter of 2010, and the available data for the third quarter are better than expected,” Trichet said in his introductory statement at the press conference held after the ECB retained its record-low key interest rate of 1%. He reiterated that current rates are appropriate.

“Despite some recent improved Eurozone economic data and surveys, the ECB is very aware that still limited recovery in the Eurozone will be buffeted over the coming months by tighter fiscal policy increasingly kicking in across the region and likely slower global growth,” IHS Global Insight’s economist Howard Archer said.

Trichet repeated that the ECB Governing Council continue to expect the euro area economy to grow at a moderate and still uneven pace in an environment of uncertainty. Further, the ECB chief said inflationary pressures over the medium term remain contained, as suggested by weak money and credit growth.

“Inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to 2% over the medium term. The firm anchoring of inflation expectations remains of the essence,” Trichet said.

The tone of the ECB statement was hardly more optimistic today than one month ago, Commerzbank economist Joerg Kraemer said. “We still do not expect the ECB to raise its key rate before the end of next year,” Kraemer said.

Turning to fiscal policies, Trichet said it is essential that budget plans for 2011 and beyond reflect a strong commitment to returning to sound public finances. In order to support the process of fiscal consolidation, Trichet said the pursuit of far-reaching structural reforms is essential. According to him, major reforms are particularly needed in those countries that have experienced competitiveness losses in the past or that are suffering from high fiscal and external deficits.

On the region’s banking system, Trichet said banks face the challenge to expand the availability of credit to the non-financial sector when demand picks up. “Where necessary, to address this challenge, banks should retain earnings, turn to the market to strengthen further their capital bases or take full advantage of government support measures for recapitalisation, Trichet said. He pointed out that data up to June indicate that, after expanding for a few months earlier in the year, the size of banks’ overall balance sheets has not increased further.

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