ECB and BoE leave interest rates on hold at record low levels

The European Central Bank has decided to leave interest rates at the historical low level of 1%. The Bank of England has mirrored this move and has also decided to keep interest rates on hold at 0.5%.

AFP - The European Central Bank and Bank of England kept their key interest rates at record low levels of 1.0 percent and 0.5 percent on Thursday while tracking the prospects of economic recovery.
  
The BoE said it would pump another 25 billion pounds (28 billion euros, 41 billion dollars) into Britain's recession-hit economy.
  
And the ECB also kept its two other benchmark rates, the marginal lending rate and the deposit rate, unchanged at 1.75 percent and 0.25 percent.
  
Any rate rises will have to wait as a strong euro, worsening labour market and potential credit squeeze continue to pressure a budding eurozone recovery, analysts say.
  
The decisions were widely expected after the US Federal Reserve said on Wednesday that it would hold its own rock-bottom interest rates steady for "an extended period" and kept trillion-dollar stimulus measures in place to support a fragile recovery there.
  
In Europe, the ECB has provided unlimited loans to commercial banks in a bid to boost credit, and observers watched for signs of a change in this policy, tipped as an early "exit strategy" once the ECB decides to unwind exceptional measures taken amid the global financial crisis.
  
Such a move was almost certainly not on the bank's immediate agenda however, as economic indicators sent mixed messages on the strength of eurozone business activity.
  
Retailers in the 16-nation bloc said sales fell again in September, reflecting a downward trend broken only in April, according to official EU data released on Thursday.
  
Meanwhile private sector business activity grew in October at the fastest rate since 2007, a survey showed on Wednesday.
  
The purchasing managers' index (PMI) compiled by data and research group Markit, rose to 53.0 points from 51.1 points in September, confirming an earlier estimate. It had ended 14 months of decline in August.
  
Deutsche Bank economist Gilles Moec told AFP after the rate decisions that "there is quite a big question mark on the behaviour of consumers next year."
  
He said ECB president Jean-Claude Trichet would likely remain very cautious in comments during a press conference later Thursday to avoid pushing the euro up in value against the dollar, which would hamper eurozone exporters.
  
"I dont think that the ECB wants to spook the markets with hints at an early exit given the impact it would have immediately on the exchange rate," he said.
  
In London, the euro traded for 1.4867 dollars, almost unchanged from its level in New York late on Wednesday.
  
On Tuesday, the European Commission hiked its eurozone growth forecast to 0.7 percent next year and 1.5 percent in 2011 having previously predicted a contraction of 0.1 percent in 2010.
  
Unemployment is nonetheless set to rise to 10.7 percent next year and 10.9 percent in 2011, the EU commission said.
  
"The eurozone's economic situation implies that short-term interest rates in all likelihood will remain very low for a long time," Natixis economist Patrick Artus said.
  
Analysts now want to know if an exceptional one-year loan of unlimited central bank funds, known as a long-term refinancing operation and scheduled in December, will be the last.
  
Moec said there was "some expectation that maybe the ECB could pre announce something on the (interest rate) spread on the December LTRO," since the bank could raise the rate at which it lends the money above 1.0 percent.
  
Hitting a peak in June with loans of 442 billion euros (656 billion dollars) -- the largest volume of funds ever provided in a single step -- the policy has helped bring down interbank lending rates.
  
Once central banks are sure lending is back on track and economies are growing on a durable basis, they can begin to consider raising benchmark interest rates.
  
Most analysts expect that to occur in the second half of 2010.

Date created : 2009-11-05