MercoPress. South Atlantic News Agency

Euro zone rates unchanged; all eyes set on 23 July EU banks’ stress-tests

ECB president Trichet called on banks for sound balanced sheets and transparency

The European Central Bank left its key interest rate on hold for the fourteenth consecutive month in July as the region's banks face stress tests to ensure the stability of the financial system that is threatened by investor fears about debt.

At the meeting held Thursday in Frankfurt, the Governing Council, led by President Jean-Claude Trichet, retained the key interest rate at 1%. The last change in the rate was in May 2009, when the bank cut the rate by 25 basis points to the current level of 1%.

The bank had lowered the key interest rate by a total of three and a quarter percentage points since early October 2008. The ECB also maintained interest rates on marginal lending facility and deposit facility at their current levels of 1.75% and 0.25%, respectively.

Below-target inflation gives room for the central bank to hold the key rate. Consumer price inflation in the 16-nation currency bloc eased to 1.4% in June from 1.6% in May. The ECB aims to keep inflation below, but close to 2% over the medium term.

In June, EU leaders had agreed to publish stress test results to restore investor confidence. The results of the tests, designed to show banks' resilience if more shocks hit the financial system, are expected to be published on July 23.

On Tuesday, ECB Governing Council member Christian Noyer said French banks have always performed well in the regular stress tests conducted in his country and are expected to do well in this month's test.

At the post-meeting press conference, Trichet urged banks and regulators to take appropriate actions to increase the resilience of financial institutions against further shocks.

“Sound balance sheets, effective risk management and transparent, robust business models are key to strengthening banks' resilience to shocks and to ensuring adequate access to finance, thereby laying the foundations for sustainable growth, job creation and financial stability,” he said.

On Wednesday the EU statistical office Eurostat confirmed that the Euro area economy maintained gradual recovery in the first quarter by expanding 0.2% following 0.1% growth in the first quarter.

Three leading European economic institutes said that economic growth accelerated in the second quarter, quashing widespread concerns of a double-dip recession. The quarterly report, prepared jointly by Germany's Ifo, France's INSEE and Italy's ISAE, projects the real GDP to rise 0.5% sequentially in the second quarter and then slow to 0.3% and 0.2% in the third and fourth quarters, respectively.

Late Wednesday, the International Monetary Fund maintained its 2010 growth outlook for Euro zone at 1%, while lowered its projection for next year to 1.3% from 1.5% predicted in April 2010. Updating its world economic outlook, the IMF said how Europe deals with fiscal and financial problems, how advanced countries proceed with fiscal consolidation, and how emerging market countries rebalance their economies, will determine the world economic outcome in the future.