Pace of decline slowing, says Trichet

The European Central Bank kept interest rates on hold at a record low of 1% today and said the euro zone economy would remain weak over the rest of the year but that the rate of contraction was slowing down.

ECB President Jean-Claude Trichet said rates remained appropriate at the current level of 1%, adding that negative inflation rates in the bloc were temporary but that price developments were likely to remain dampened.

The euro zone's gross domestic product suffered a 2.5% plunge in the first quarter.

Trichet's comments are in line with analysts' expectations that the ECB will keep rates unchanged until the end of the third quarter of next year.

'Current rates remain appropriate,' Trichet said at his monthly news conference after the bank's interest rate decision.

'Economic activity over the remainder of this year is likely to remain weak, although the pace of contraction is clearly slowing down,' he added.

The ECB has cut interest rates by 3.25 percentage points since October, but they remain the highest among the biggest developed economies.

The Bank of England also left its key lending rate unchanged at 0.5% today, but surprised markets by saying it will pump an extra £50 billion sterling into the economy.

Euro zone consumer prices have started to fall but Trichet again expressed confidence that the bloc would not suffer broad deflation.

'We expect the current episode of extremely low or negative inflation rates to be short-lived and price stability to be maintained over the medium term,' he said.

Referring to 2010, he added: 'After a phase of stabilisation a gradual recovery with positive quarterly growth rates is expected.'

All 75 economists in a Reuters poll last week had expected the ECB to keep the main policy rate unchanged today for the third month in a row.

After a slow start, the ECB has bought almost €5 billion in bonds backed by mortgage and public sector assets. Corporate lending fell sharply in June, while banks tightened credit standards again in the second quarter of the year and expect to tighten further in the third quarter, but at a slower pace.

The ECB has repeatedly urged banks to lend on the close to €500 billion in one-year funds they borrowed from the ECB in late June, as a revival in bank lending is key to supporting the real economy.