The European Central Bank expects the euro zone's economic recovery to be moderate and uneven, President Jean-Claude Trichet said on Thursday after the bloc's interest rates were held at a record low 1.0 percent.
Trichet welcomed a decision to publish the results of stress tests on European banks and said action should be taken where problems came to light.
"Appropriate action will have to be taken where needed," Trichet told a news conference. "Sound balance sheets, effective risk management and transparent robust business models are key to strengthening banks' resilience to shocks and to ensuring adequate access to finance."
European supervisors shored up some confidence in the stress tests they are imposing on banks, as markets focused on finding out more detail about the process before delivering a final verdict. ]
Europe has listed 91 banks taking part in the tests — including many regional banks where markets suspect most of the problems lie — as it seeks to restore confidence in the sector. The results are due to be published on July 23.
Trichet said robust bank lending was crucial for sustainable growth, which he said would remain patchy.
"Looking ahead, we expect the euro area economy to grow at a moderate and still uneven pace in an environment of high uncertainty," he told a news conference after the ECB held its main rate at 1.0 percent for the 14th month running.
Trichet said latest evidence showed a quickening of economic activity in the Spring.
"However, the recovery in activity is expected to be dampened by the process of balance sheet adjustment in various sectors and labour market prospects," he said.
The euro zone economy grew by just 0.2 percent in the first quarter of the year on a quarterly basis.
All 76 economists recently polled by Reuters had expected the ECB to keep interest rates at 1.0 percent.
"No change, as expected," Lloyds TSB economist Kenneth Broux said of the rate decision, adding that he expected the ECB to keep rates on hold until at least the end of the year.
Official data earlier showed euro-priced interbank lending rates hit their highest levels in 10 months on Thursday.
The creep up in the bank-to-bank lending rates came amid signs of slowing euro zone growth and market concerns that the bank stress tests will not restore confidence.
"While the ECB might exude swan-like calm on the surface, underneath it's thrashing around to keep its head above water," said Steve Barrow, currency strategist at Standard Bank.
LIQUIDITY
Throughout the crisis, the central bank has sought to address worries by offering banks extra cash.
The ECB has taken comfort from banks' apparent trouble-free repayment of 442 billion euros ($557 billion) in emergency loans last week — an obligation they met with only modest demand for the new funds the central bank offered to smooth the process.
Trichet said there was no question of turning down the taps yet.
"I would say that we are still in a mode, as you know, of an unlimited supply of liquidity both for the one-week MRO (main refinancing operation), one month and three months," he said.
Market players are seeking guidance on whether the ECB plans to extend its liquidity support beyond the current end-date of mid-October.
They also want the central bank to spell out more details of the government bond purchase programme it began in May to contain Greece's and the euro zone's debt crisis.
"We didn't change in any respect the purpose of the programme … but we will continue to observe that with great attention that what is needed in terms of level of interventions from our part has been progressively diminishing," Trichet said.
