Trichet sees upside risks from stimulus measures and recommends governments to withdraw them

The ECB opted to hold rates steady today at their historic record low of 1.0% while withholding their bond purchase program at the current 60 billion euros. Markets expected that same scenario to take place after the improvement signaled recently, referring that the worst is over.

In the conference following the decision, Trichet confirmed that the undergoing monetary measures adopted remains "appropriate" and suitable in the undergoing period to spur economic growth and help the financial sector to stabilize.

Price pressures remain subdued and inflation will resume to positive territories in the coming period and will stabilize over the medium term. Trichet attributed the current negative rates to the decline in commodity prices. He ensured that inflation expectations are firmly anchored, where the previous inflation forecasts were that inflation will reach 0.4% in 2009 and 1.2% in 2010.

Moreover, the economy will recover gradually, and growth will appear in the second half of the current year, where he expects GDP to improve on the quarterly basis, while the economy’s outlook is broadly balanced, Trichet said in his speech.

Thus, most importantly, there are upside risks from the stimulus measures and therefore banks should start withdrawing them since the economy continues to stabilize and the labor market’s deterioration may prove to be less than expected, which adds further evidence to the light that is shinning at the end of the tunnel.

Though he said that the region should benefit from exports, which come as global demand start to recover and the euro's appreciation against the dollar is a clear sign of recovery, but he did not focus on the negative consequences of the dollar's devaluation.

The reversal in monetary easing by the ECB has to be coordinated as national governments’ withdraw stimulus measures. Lack of coordination between both shall have adverse effects on the economy, and predominantly on price stability, which is the ECB’s main concern.

In his speech, Trichet stressed that banks should take the suitable steps to strengthen the capital base and he sees downside risks from financial sector feedback to economy as loans should incline in the coming period but with lag.