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ECB leaves rates unchanged amid brighter backdrop

/ Source: The Associated Press

Europe's economy is doing better than expected as the continent's government debt crisis eases, the European Central Bank's president said Thursday — but he cautioned that growth would remain "relatively modest."

Jean-Claude Trichet's comments underlined the new-found optimism about the 16-nation eurozone's prospects after it appears to have put the worst of the debt crisis behind it.

Trichet's monthly news conference came after the bank, as expected, left interest rates unchanged at a record low 1 percent for the 15th consecutive month. There was no hint as to when the bank might consider raising rates — a prospect that still appears distant given modest growth prospects and little sign of inflation.

Trichet said that "the available data for the third quarter are better than expected" after picking up in the second quarter.

Still, he expected the second half of this year "to be significantly less dynamic than the second quarter, because the second quarter seems to be really exceptional," he added. Second-quarter data are due next week.

"I would not elaborate more on that," Trichet said. "The main message is we remain cautious and prudent, we consider that we have undoubtedly a recovery ... but again growth is likely to remain uneven and relatively modest."

Trichet's comments followed a period when the market concern has shifted to worries about the U.S. economy losing steam, and away from the government debt crisis which engulfed the eurozone for much of the beginning of the year. Europe, meanwhile, has benefited from a pickup in global trade.

A relaxed-looking Trichet, facing his first news conference for months that wasn't dominated by questions about potential government debt defaults, shrugged aside the shift.

"I think that after having been extremely negative on Europe and extremely positive on the U.S., we are now observing some kind of swing in the other direction," he said, adding that the ECB "did not declare victory."

"I would say that it would be very premature to draw very negative conclusions on the U.S. economy at the moment," Trichet said.

Also Thursday, the Bank of England left its interest rate unchanged at 0.5 percent for the 18th month.

"After today's central bank meeting, we see no reason to change our forecast that the ECB will not raise its key rate before the end of next year," said Joerg Kramer, the chief economist at Commerzbank in Frankfurt.

He described Trichet's tone as "hardly more optimistic" than before, but noted that he is now describing the environment as one of "uncertainty" rather than "high uncertainty."

The ECB is due to issue its revised economic projections next month, and Trichet's words suggested they "will likely be revised slightly upwards again," said Frederik Ducrozet of Credit Agricole.

The ECB forecast in June that the eurozone economy will grow between 0.7 percent and 1.3 percent this year and between 0.2 percent and 2.2 percent in 2011.

Ducrozet also noted that Trichet "refused to send any clear signal" on the future of its unconventional support measures ahead of next month's meeting.

The ECB has been able to scale back several crisis measures and its emergency program to prop up bond markets by buying the debt of troubled governments has nearly ground to a halt.

"I am quite happy that this program — which continues — is meager," Trichet said, adding that he would offer "no further indication" on how it will proceed in future.

Trichet declared Europe's stress tests on 91 banks, whose results were published late last month, "a very impressive success." Only seven banks failed, and many observers deemed the exercise too easy, but fears of renewed market turbulence proved unfounded.

Successful bond auctions by financially shaky Greece, Portugal and Spain also have helped calm markets.

Meanwhile, German data Thursday showed industrial orders returning to strong growth in June.

In Athens, the IMF, EU and ECB said Greece has made good progress implementing an austerity program to tackle its debt crisis and is expected to receive the second installment of rescue loans next month.

Trichet described that as "part of the overall picture," and the issue barely featured at Thursday's session in Frankfurt after months of worries.

"I see that there is absolutely no question on Greece, which I appreciate enormously," he said as he closed his news conference.