The European Central Bank announced that it is keeping interest rates unchanged, but will begin unwinding its extraordinary credit measures in the coming year.

At Thursday’s meeting, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.00%, 1.75% and 0.25% respectively.

Additionally, it said that it has decided to continue conducting its main refinancing operations for as long as is needed, and at least until the third maintenance period of 2010 ends on April 13. Regarding longer-term refinancing operations in the first quarter of 2010, the Governing Council said it has decided to carry out the last operation on March 31, 2010.

Amid these decisions, TD Bank economists note that the ECB staff upgraded their forecasts for GDP growth in 2010, but that the inflation forecasts were left largely unchanged. “Looking at a broad array of indicators for future inflation, the ECB still sees these pressures as subdued,” it says.

“We do see the economy performing somewhat better than the ECB is currently forecasting and believe they will be inclined to begin to raise interest rates in mid-2010 as the economy outperforms their current forecasts,” TD adds.

That said, TD notes that there were no indications in Thursday’s action that suggests the ECB is looking to raise interest rates any time soon. “While the descriptions of credit markets and monetary aggregates painted a picture of normalization, they still pointed to weak inflationary pressures into 2011.”

“While Eurozone inflation will increase to over 2% in the beginning of 2010, this is purely because inflation was so low at the beginning of 2009, so year-over-year inflation will appear high. It is the forecasts for inflation further out which will drive the ECB’s decisions on interest rates,” it says.

“For now, [ECB president Jean-Claude] Trichet sees risks associated with acting too early or too late, and sees the move today as the right balance,” TD concludes.