Eurozone interest rate secured at 1.0 pct: analysts

FRANKFURT (AFP) - The eurozone's key interest rate is locked in at a record low of 1.0 percent until the 16-nation economy pulls firmly out of recession, which could take longer than expected, analysts say.

European Central Bank policymakers meet Thursday in Venice for one of two meetings held annually away from the bank's headquarters in Frankfurt.

They will leave the main rate steady, and "with the risk of deflation lingering, we still see official interest rates on hold for much longer than markets anticipate," Capital Economics economist Jennifer McKeown said.

Prices across the eurozone fell in September for the fourth month running, by 0.3 percent according to an estimate by the EU Eurostat data agency.

Economists nonetheless do not expect the bloc to be gripped by deflation, a long run of falling prices that can set in motion a vicious spiral of falling demand, falling output, wages and employment, and a further decline in demand.

But even though some economies have begun to rebound from their worst recession since the Great Depression, economic activity will be modest and uncertain for awhile and the risk of a another dip cannot be ruled out.

The latest survey of eurozone manufacturers by Markit Economics showed that output fell for a 16th consecutive month in September, though it was near the point that would finally indicate growth.

Commerzbank economist Michael Schubert said the ECB governing council "does not believe the economic recovery is sustainable because it is largely based on government action to support the economy, such as looser monetary policy, aid for the banking sector and fiscal stimulus packages."

The euro's rise could also hobble eurozone exports, and ECB president Jean-Claude Trichet warned that "excessive volatility and disorderly movement in exchange rates has adverse implications" for the economy.

To improve credit conditions the central bank lent eurozone banks last week a little more than 75 billion euros for a year at 1.0 percent.

The amount taken up was almost one sixth of the record 442 billion euros churned out when the ECB first lent funds for a year in June however.

"We doubt that the ECB's latest actions will prevent further falls in bank lending or make a material difference to the economic outlook," McKeown said.

Credit flows to businesses and households have dwindled as demand for loans fell and banks tightened conditions under which they were willing to lend.

Another problem facing the eurozone is unemployment, which climbed in August to a 10-year high of 9.6 percent and could surpass 10 percent next year according to the International Monetary Fund.

The rate could reach nearly 12 percent by 2011, the IMF warned.

It forecast that the eurozone economy would contract by 4.2 percent this year, though it could begin pulling out of recession in the second half before growing by just 0.3 percent in 2010.

In London, the Bank of England was also expected to maintain its key rate at a record low of 0.50 percent on Thursday as Britain also looks to return to growth before the end of the year.