ECB to begin exit from emergency bank support

The European Central Bank is to begin withdrawing its massive support for the European single currency zone's financial system, despite warning that the economic recovery is likely to be fragile and patchy next year.

Jean-Claude Trichet, president of the ECB, said yesterday that the dismantling of support would be gradual, with the key interest rate for the eurozone likely to stay at 1 per cent until well into 2010. But Mr Trichet added: "The improved conditions in financial markets have indicated that not all our liquidity measures are needed to the same extent as in the past."

Mr Trichet said he expected the eurozone economy to grow by 0.8 per cent during 2010 and by 1.2 per cent in 2011. The low forecasts, which are more pessimistic than those of many economists, reflect the fact that while countries such as Germany and France now seem to be recovering strongly, others, such as Spain and Greece, remain mired in recession. The recovery will be "uneven" Mr Trichet added, and the outlook is "uncertain".

Howard Archer, the chief European and UK economist at IHS Global Insight, said Mr Trichet was taking a cautious approach.

He said: "The ECB stressed that its liquidity support remains substantial and indicated that its exit strategy will be gradual and timely given likely only gradual Eurozone recovery, the major uncertainties still surrounding the outlook, subdued inflation over the policy-horizon period and anchored medium-term inflation expectations."

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