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Business

ECB keeps interest rates at record low

Text by NEWS WIRES

Latest update : 2009-08-06

Despite tighter lending conditions and fears of deflation, the European Central Bank (ECB) kept its main interest rate unchanged at a record low of one percent on Thursday. The Bank of England also left its key rate unchanged at 0.5 percent.

AFP - The European Central Bank kept its main interest rate steady at a record low of 1.0 percent on Thursday, a spokesman said, despite tight credit and concern the eurozone could be hit by deflation.

In London, the Bank of England left its key lending rate unchanged at 0.50 percent but surprised markets by saying it will pump an extra 50 billion pounds (59 billion euros, 84 billion dollars) into the economy.

The British central bank decided "to continue with its programme of asset purchases financed by the issuance of central bank reserves and to increase its size by 50 billion pounds to 175 billion pounds," a statement said.

Central banks in major economies are trying to boost flagging economies with ultra-low lending rates and unconventional monetary policies aimed at resolving a credit crunch that has hampered economic activity.

In Frankfurt, the ECB also left two other reference rates, the marginal lending rate and the deposit rate, unchanged at 1.75 percent and 0.25 percent, respectively.

Economic activity has shown signs of picking up in the 16-nation eurozone, while surveys of businesses and consumers also suggest its first recession is finally winding down.

In Germany, the biggest eurozone economy, industrial orders jumped by 4.5 percent in June in following a 4.4-percent rise in May, the economy ministry said Thursday before adding that prospects for the key sector had improved.

"The strength in demand came in the end from foreign orders which increased by 8.3 percent," despite a rise in the euro's value, the ministry said in a statement, especially good news for the country's export-oriented economy.

For the full 16-nation eurozone, an index of purchasing managers' activity in the manufacturing and services sectors by the Markit survey company firmed for the fifth month running in August to its highest reading in a year.

Eurozone lending conditions have become more restrictive however, and consumer prices have fallen in June and July for the first time, posing threats to a solid recovery as the bloc remains stuck in its first recession.

"Key risks include the effect of the still weak banking sector and the contraction in lending as well as the possibility of outright deflation in the eurozone," Goldman Sachs economist Erik Nielsen said.

At a press conference later on Thursday, ECB president Jean-Claude Trichet was expected to hold possible further interest rate cuts in reserve while the bank waited to see if measures taken so far help ease the economic slump.

The US Federal Reserve and Bank of Japan have lowered their main interest rates to almost zero and have implemented special programmes to pump hundreds of billions of dollars and yen into the financial system.

ECB governors have also supplied unlimited amounts of cash to the eurozone banking system and have pledged to buy 60 billion euros (85 billion dollars) worth of low-risk corporate bonds to unblock a crucial business credit market.

But its latest survey of commercial banks found many would still tighten credit conditions owing to concerns over poor business prospects and to bolster bank balance sheets as they seek to emerge from a dogged financial crisis.

Annual growth of loans to the private sector fell to a record low of 1.5 percent in June.

Like many peers however, ING chief eurozone economist Peter Vanden Houte expected the ECB to "reinforce the message of lasting stability.

"Events are playing out nicely for the ECB, with the first signs of a recovery, in combination with low inflation, justifying its current monetary stance," he said.

Date created : 2009-08-06

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