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ECB keeps rates steady despite banking crisis

Latest update : 2008-10-02

The European Central Bank left its main lending rate unchanged at 4.25% despite growing pressure to ease credit in the wake of the international banking crisis.

Watch our Top Story, "Bailout on the ropes", our Face-Off show, "No bailout, no way out?", and the France 24 Debate, "Crisis strikes Europe".

Read Douglas Herbert's commentary and our coverage of the effects of the crisis on French banks.

Find out more about the origins of the greatest financial crisis in decades and watch Professor Gerardo Della Paolera explain how we got there.

Read "How to spend $700 billion".

 

 

 

The European Central Bank kept its main lending rate steady at 4.25 percent Thursday despite growing pressure from the international banking crisis and slumping eurozone economies.
  
Worries that rising wages could stoke inflation were believed to have helped convince ECB governors that the time was not yet ripe for a rate cut.
  
"The governing council is still worried about what it sees as significant upside risks to inflation," Capital Economics economist Jennifer McKeown said after the decision was announced.
  
At Bank of America, economist Gilles Moec said: "Grave ECB concerns about rising wage inflation still make the bank reluctant to take the risk of cutting 'too soon,'."
  
Germany's IG Metall trade union launched wage talks with bosses on Thursday and is seeking an eight-percent pay hike for 3.6 million workers -- the highest the union has sought in 16 years.
  
The widely expected ECB decision also left the bank's other key rates -- the deposit rate and the marginal lending rate -- unchanged at 3.25 percent and 5.25 percent respectively.
  
Pressure on the bank to act might have eased following the US Senate's passage of a 700-million-dollar (500-million-euro) rescue package for banks that it was hoped would calm nervous markets.
  
That legislation must still be approved by the House of Representatives, however.
  
ECB policymakers focus on inflation, which has edged lower to 3.6 percent but is still way above the bank's target of just below 2.0 percent.
  
ECB president Jean-Claude Trichet was likely to stress that position again at press conference later on Thursday.
  
Calls for rate cuts have multiplied however, not only owing to the global financial crisis, but also because the 15-nation eurozone economy is flirting with a recession.
  
Manufacturing activity fell again in September according to a key purchasing managers' index that languished in contraction territory for the fourth month running.
  
Unemployment has also started to creep back up in many eurozone countries.
  
McKeown said that "as inflation slows sharply, the ECB's full attention should turn to the weakness of the real economy."
  
Central banks including the ECB and US Federal Reserve have thrown lifelines to interbank money markets by injecting huge amounts of cash in a bid to keep credit flowing but those operations cannot resolve the crisis.
  
The Fed's key interest rate now stands at 2.0 percent meanwhile, which does not leave it much room for manoeuvre to the downside.
  
Many observers say the worst financial crisis since the 1930s Great Depression will only begin to improve when commercial banks regain enough faith in each other to begin lending on interbank markets again.
  
Against the backdrop of financial turmoil, analysts will listen closely for what Trichet tells media about the bank's monetary policy and the economic outlook in general.
  
If Trichet repeates that "the current monetary policy stance will contribute to achieving our objective" of price stability, Moec said it would signal that "rates will be on hold almost certainly for November and possibly well beyond."
  
If the phrase was eliminated from the ECB's statement, it could mean "that the rate cut could occur before the end of this year," he added.
  
UniCredit economist Marco Valli said: "We will look carefully for any sign of a more cautious labour market assessment" that could point to weaker economic forecasts.
  
"This would be an important signal on the way to rate cuts."
  
Royal Bank of Scotland economist Dario Perkins felt that weakening economic growth and lower oil prices "will be sufficient to warrant a reduction in interest rates next spring" in the northern hemisphere.

Date created : 2008-10-02

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