Deflation hovers over ECB meeting in Luxembourg

LUXEMBOURG (AFP) - The European Central Bank's governing council met in Luxembourg under the shadow of deflation, and was set to hold the bank's main interest rate steady at a record low of 1.0 percent.

An ECB spokeswoman told AFP the 22-member council had gathered outside of the ECB's Frankfurt headquarters for one of two yearly consultations in a eurozone member country.

The group will take stock of the 16-nation zone's dip into deflation, and a dramatic move last week aimed at boosting lending to companies and households.

With the eurozone stuck in its first recession, the central bank lent a record 442 billion euros (626 billion dollars) to commercial banks for a full year at 1.0 percent, the first time such loans have exceeded six months.

Eurozone interbank markets responded quickly to the stimulus, and long-term lending rates fell below those in the

United States even though the US Federal Reserve's benchmark Fed funds rate is just 0.25 percent.

ECB president Jean-Claude Trichet will nonetheless face repeated questions from media on Thursday about deflation and whether the central bank will lower its main rate further, something most observers feel is unlikely.

Eurozone consumer prices fell in June for the first time since the European Monetary Union was formed, with inflation slipping to minus 0.1 percent just a year after reaching a record 4.0 percent.