ECB anchors interest rate at record low of 1.0%

VENICE, Italy (AFP) - European Central Bank (ECB) policymakers meeting in Venice kept the ECB's key interest rate anchored at an all-time low point of 1.0 percent, a bank spokesman said on Thursday.

In London, the Bank of England also maintained its main lending rate at a record low of 0.50 percent after the International Monetary Fund agreed on a mandate to foster recovery from the worst crisis since the Great Depression.

The ECB governing council which manages eurozone monetary policy is waiting for signs of a sustained recovery in the 16-nation bloc and elsewhere before unwinding a series of stimulus measures and eventually raising rates.

But on Wednesday, the latest data showed the economy had faltered, leaving so-called "exit strategies" in the background.

Eurozone activity contracted in the second quarter by 0.2 percent, a bigger margin than initially estimated, revised European Union (EU) statistics showed.

That and a continued dip of the consumer price index into negative territory meant the ECB could maintain exceptional measures such as generous supplies of cash to banks and the purchase of low-risk corporate bonds for awhile.

Keeping the eurozone interest rate at a record low also avoids adding upward pressure on the euro, which has risen in value against the dollar and other currencies, making it harder for exports to fuel a recovery.

Markets expect the central bank to remain on hold until next year because the economic recovery is forecast to be weak and fraught with uncertainty and governments must get to grips with soaring public deficits.

The ECB council holds two of its meetings each year away from the bank's headquarters in Frankfurt, and this time called media to a 16th century Venetian monastery owned by Telecom Italia.

Remarks by ECB president Jean-Claude Trichet at a press briefing following the rate decision will be examined for signs of how long the bank might pursue its supportive policies, on which he is expected to reveal few details.

Trichet will probably comment on the ECB's loan last month of 75 billion euros (111 billion dollars) to commercial banks for a year, pointing to a drop from a record 442 billion euros in June as a sign that interbank lending markets were slowly returning to normal.

But UniCredit chief eurozone economist Aurelio Maccario told AFP he wondered if Trichet would address what some experts say is becoming "a two-tier money market."

Major banks have access to credit and cash, but small and medium-sized institutions "remain addicted to ECB liquidity," Maccario warned.

Eurozone businesses report that getting credit is harder, and the ECB has pressed commercial banks to relay more central bank cash to the wider economy.

UBS analysts felt Trichet might be drawn out on "macro-prudential supervision in Europe and regulation" as proposals are drafted for a European Systemic Risk Board that would include six ECB council members.

Market attention has also been drawn to remarks by Trichet and other ECB officials on foreign exchange rates as the euro climbed recently against the dollar and Asian currencies that are pegged to it.

"Trichet has repeated his hints that the council is becoming more concerned over the strength of the euro," Capital Economics economist Jonathan Loynes noted.

The rise could undermine eurozone exports and efforts to trim unemployment, which climbed in August to a 10-year high of 9.6 percent.

ING senior economist Carsten Brzeski added that Trichet would also probably "shine some light" on EU finance ministers' decisions to turn away from fiscal consolidation next year.