LUXEMBOURG (AFP) - - The European Central Bank kept its main interest rate steady at a record low of 1.0 percent Thursday as ECB chief Jean-Claude Trichet downplayed a threat of deflation gutting the eurozone.

The ECB expects “the current episode of extremely low or negative inflation rates to be short-lived,” Trichet told a press conference two days after an EU estimate said eurozone consumer prices had fallen for the first time in June.

Economists are concerned the 16-nation bloc’s economy will struggle to recover from recession if consumer prices fall broadly over a sustained period.

That encourages households to postpone purchases in expectation of still lower prices, undermines production and threatens job numbers that are now starting to contract sharply in countries like Ireland and Spain.

Trichet repeated an ECB estimate that the eurozone should begin to see a gradual recovery of economic growth by mid-2010, while leaving the door open to another interest rate cut.

He said the governing council’s decision to leave rates unchanged, which was unanimous, did not mean “this was the lowest level we would ever attain under any circumstances.”

ING economist Carsten Brzeski commented that after a rate cut in May, the presentation of unconventional measures in June and a massive loan operation last week, “the ECB has now released the accelerator and switched to cruise control.”

In Sweden, which is not a eurozone member, central bank officials cut their key interest rate to a record low of 0.25 percent Thursday to boost that country’s flagging economy.

But in Iceland, the central bank held its key rate at 12 percent following four cuts in the last three months.

The ECB wants to see what will emerge from its unorthodox plan to buy low-risk corporate bonds and record loans to commercial banks last week that were meant to boost credit to the economy as a whole.

With the economy floundering, the ECB launched an enormous life raft, lending banks 442 billion euros (626 billion dollars) for a year at 1.0 percent.

It was the central bank’s first 12-month refinancing operation and drew an all-time high of more than 1,100 commercial banks.

Trichet told reporters: “We were happy with the result of this liquidity supply.

“The amplitude of this operation is in our eyes the proof of the pertinence of this channel for our enchanced credit supply,” he added in reference to an ECB focus on keeping banks at the center of its monetary policies.

But the ECB chief stressed the exceptional measures must “be accompanied” by an appropriate “joint effort” from commercial banks.

Trichet said he and the ECB governors “have not envisaged any new measures or operations” to spur economic activity.

With economic data and surveys suggesting the eurozone’s economic freefall has slowed in recent months, “the ECB clearly believes that it can afford to stand back in the near term at least and monitor what impact its various policy moves are having,” IHS Global Insight economist Howard Archer said.

Brzeski added that “despite the parallels with Japan in the 1990s, the ECB still appears not concerned with deflation at all.

“The D-word is being avoided.”

Finally, the ECB said it would ensure that its extraordinary measures “are quickly unwound and that the liquidity provided is absorbed” as soon as the economic climate improved.

It urged eurozone governments to do likewise, saying they “should prepare and communicate ambitious and realistic fiscal exit and consolidation strategies” after approving massive stimulus packages to combat the worst global recession in six decades.

The European Central Bank’s current efforts to boost the euro-zone economy go far enough unless the situation deteriorates markedly, ECB Governing Council member Axel Weber was quoted on Monday as saying.
In an interview with the Financial Times Deutschland, Mr Weber backed the ECB’s moves to cut its main interest rate to 1 per cent and buy about 60 billion euros worth of covered bonds.

Some of the ECB’s 22 policymakers have suggested the ECB could go further, but Mr Weber’s comments made it clear he sees no need for expansion at the moment even though he warned against taking an overly optimistic view of the recovery.

‘Unless things get noticeably worse, in my view, the package of measures decided until now is sufficient,’ he was quoted as saying when asked if ECB’s asset purchases would stop at covered bonds.

‘We have to turn our primary attention in terms of monetary policy to letting the steps we have already undertaken take effect. There are still things in the pipeline.’

Mr Weber said the step exposed the ECB to only slim risks and the central bank had every intention of putting its pledge into action, with details to be announced in June.

Also, the 1 per cent level for the main refi rate was adequate and took into account a hefty downward revision in ECB staff projections, also due for release in June, he said.

The comments are the latest in a series of differing public statements about how far the ECB should go to support the recovery, although policymakers have denied any major split.

Mr Weber said the ECB’s baseline scenario was for a weak economic recovery, no credit crunch and no deflationary spiral.

‘We expect to have some months of negative inflation rates in summer, but towards the end of the year, inflation will rise again to levels of 1 per cent of above,’ he told the paper.

Don’t exaggerate on growth Mr Weber said there were signs that the downward economic trend was easing in industrialised and developing countries, but they were still in a period of weakness and labour markets could worsen further.

‘I really warn against overly exaggerating the signs of hope on financial markets and the signs of a calming in the economic cycle,’ Mr Weber said.

‘The financial crisis is just starting to reach people, through job losses. Declaring the start of the recovery prematurely has inherent dangers. People become disappointed, and that can have an enormous negative impact on confidence.’

In Germany, the euro-zone’s biggest economy, the high point of unemployment was likely to be reached only in winter 2010/2011.

‘For Germany, I see slightly positive growth rates only in mid-2010,’ Mr Weber said, in a slight shift from earlier comments flagging positive growth rates only in the second half of 2010.

He said he expected a similar profile in the euro zone, with growth only likely to come near its long-term potential in 12 to 18 months’ time.

Mr Weber also said US-style bank stress tests were not suited for the euro zone, given the diversity of banks’ portfolios and operations and sweeping comparisons were therefore ‘not very meaningful and potentially misleading.’