THE EUROPEAN Central Bank (ECB) kept euro zone interest rates at 1 per cent yesterday, bolstering expectations they will stay there well into next year, and said it would start buying bonds next week.

ECB president Jean-Claude Trichet gave no sign the ECB was planning to move rates from the current record low level soon, saying they remained “appropriate”. However, he left the door open for further cuts if needed.

Following a nearly half-trillion euro cash injection by the ECB last week, Mr Trichet made a point of urging banks to pass on the benefits of ultra-cheap funding the ECB is pouring into the market.

He also revealed the bank will begin its unorthodox programme of buying mortgage and public sector debt-backed bonds on July 6th, targeting maturities of between three and 10 years.

National central banks will make 92 per cent of the purchases, and the ECB said they would be able to use their discretion in some cases on whether bonds were eligible or not. As a rule, bonds should be rated at least AA, although some bonds rated as low as BBB- will also be eligible.

The purchase programme will kick in as economic data shows increasing signs the worst of the economic tempest may now have passed, although the ECB appeared cautious.

Mr Trichet appeared to play down the outlook for the rest of this year, saying economic activity would remain “weak” and that “after a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected by mid 2010”.

The comments pushed the euro down against the dollar and bolstered analysts’ expectations that euro zone rates will stay on hold until the fourth quarter of 2010. The ECB’s rates remain the highest among G7 economies.

Figures this week showed euro zone prices are now falling. Mr Trichet, however, dismissed the likelihood of serious deflation. – (Reuters)