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Business

ECB to keep record-low interest rates

Text by NEWS WIRES

Latest update : 2009-06-04

The European Central Bank (ECB) is poised to keep interest rates at a record low of 1.0 percent. Given the Eurozone's economic recession, economists expect the ECB to restrict its key rates well into 2010.

AFP - The European Central Bank is tipped to keep its key interest rate at an all-time low of 1.0 percent on Thursday and to release details of bond purchases aimed at freeing up clogged credit markets.
   
The ECB has slashed its main lending rate by 3.25 percentage points in less than a year, but eurozone credit has still gotten tighter because commercial banks have not passed on much of the unlimited cash now at their disposal.
   
"The focus has now shifted to developments surrounding unconventional policies" to spur growth, said economist Jennifer McKeown at Capital Economics.
   
Latest ECB staff forecasts for growth and inflation are also due on Thursday after the rate decision, with the 2009 growth estimate likely to be revised sharply lower following a disastrous first quarter.
   
The 16-nation economy contracted by a record 2.5 percent from the last three months of 2008 and by 4.8 percent from the first quarter of last year, official data showed on Wednesday.
   
That was the sharpest downturn since records began in 1995, the Eurostat statistics agency said, and meant the eurozone has now endured four straight quarters of economic recession.
   
Unemployment reached a 10-year high of 9.2 percent in April meanwhile after rising for the 13th month running.
   
Given such weakness, IHS Global Insight expected the ECB to keep its main rates on hold "until well into 2010 and it is very possible that they could be trimmed further," chief European economist Howard Archer said.
   
"It's also very possible that the ECB could ultimately extend and widen its asset purchasing scheme" if signs the recession was easing prove premature and if deflation risks increased, he added.
   
The ECB plans to buy 60 billion euros' (85 billion dollars) worth of low-risk bonds to underpin credit, but that figure is small compared with schemes established by the US Federal Reserve and Bank of England.
   
They are set to spend 300 billion dollars (210 billion euros) and 125 billion pounds (145 billion euros, 178 billion dollars), respectively, and also to buy government bonds, effectively underwriting government deficits.
   
That caused German Chancellor Angela Merkel to issue a rare critique on Tuesday, saying: "We must return to a policy of having independent central banks."
   
Others charge however that the ECB has been too timid in fighting the recession and have called on the Frankfurt-based central bank to pump more money into the economy.
   
ECB policymakers resist anything that might drive up inflation however, and even though prices were essentially unchanged in May, they have avoided moves that could not be reversed quickly once the economy begins to expand again.
   
Observers will also be keen to hear how ECB president Jean-Claude Trichet and the governing council plan to pay for the bond purchases, either by printing new money, or by "sterilising," or offsetting the operation through the sales of other assets, for example.
   
"The issue of sterilisation and any hints of the possibility that the programme may be extended in terms of quantity and types of assets are key to watch," UniCredit analysts said.
   
 

Date created : 2009-06-04

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