ECB Warns of ‘Bumpy Road’ as Officials Signal No Stimulus Exit

European Central Bank officials led by President Jean-Claude Trichet greeted mounting evidence of an economic recovery with caution, suggesting they won’t rush to reverse their emergency stimulus.

“We see some signs confirming that the real economy is starting to get out of the period of freefall,” Trichet said at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming, on Aug. 22. This “does not mean at all that we do not have a very bumpy road ahead of us.”

The wariness indicates the ECB won’t soon rein in the steps it took to staunch the deepest slump since the 1930s, such as by charging banks a higher interest rate when it next lends them unlimited money for a year. While the economy may be expanding again after contracting 0.1 percent in the second quarter, it’s dependent on policy makers for support and is threatened by the highest unemployment rate in a decade and the weakest bank lending on record.

“Even with the pretty nice figures we’ve been seeing, some at the ECB question how sustainable the recovery is,” said Gilles Moec, a former Bank of France official and now an economist at Deutsche Bank AG in London. “‘The ECB is not yet looking to start ending their exceptional measures.”

Increasing Confidence

Figures to be released this week may add to optimism a recovery is now underway, with economists predicting consumer and business confidence rose in the euro area this month to the highest since October. Industrial orders probably gained in June by the most in 17 months, economists forecast.

European stocks rose last week, sending the Dow Jones Stoxx 600 Index to its highest level since October. The index is about 40 percent below where it was when the credit contraction began two years ago this month.

BASF SE, the world’s biggest chemical company based in Ludwigshafen, Germany, said Aug. 20 that it now has fewer employees on shortened workweeks at its main German plant as demand is stabilizing. Munich-based Centrosolar Group AG, the maker of rooftop solar energy systems, said the next day that it aims to return to profit this half as demand from homeowners increases and the company overcomes losses in Portugal and the Netherlands.

Such improvements don’t yet merit the ECB beginning to unwind its aid, council members Ewald Nowotny and Erkki Liikanen said in separate interviews at the forum sponsored by the Kansas City Federal Reserve Bank. Trichet and about half his 22-member Governing Council attended the conference.

‘Steady Hand’

“There is no reason to reassess our monetary-policy stance,” said Liikanen, who runs the Bank of Finland. Nowotny, the head of Austria’s central bank, said he didn’t see “any need for immediate reaction” and that officials would maintain “a policy of steady hand, but without pre-committing.”

“The freefall is over, but we must remember the level of economic activity is still below what it was a year ago,” said Liikanen. Bundesbank President Axel Weber told CNBC that it’s “too early to say it won’t be a bumpy road ahead.”

When needed, the ECB will implement a “credible exit strategy” from its crisis policies, Trichet said.