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Business

ECB holds eurozone key interest rate at 1.0 percent

Text by News Wires

Latest update : 2010-06-11

The European Central Bank is to maintain its key interest rate at a record low 1.0 percent. ECB President Jean-Claude Trichet (photo) said it would fight inflation while ensuring unlimited amounts of cash to commercial banks until the end of 2010.

AFP - European Central Bank president Jean-Claude Trichet pledged Thursday that the ECB would fight inflation while ensuring that commercial banks get crucial funding to avoid another credit crunch.

"We are inflexibly attached to price stability," Trichet vowed after the ECB maintained its key interest rate at a record low 1.0 percent.

But he added that the ECB would still lend unlimited amounts of cash to commercial banks in regular three-month refinancing operations through September to ensure plentiful liquidity in interbank lending markets.

"We decided today to adopt a fixed-rate tender procedure with full allotment," Trichet said.

The re-financing move appeared to be a response to the realisation that lending between banks has begun to freeze up on fears that borrowers might suffer heavy losses on loans to the private sector and some governments.

A similar credit crunch arose after the collapse of the US investment bank Lehman Brothers in September 2008 and was also met then with the provision of huge amounts of cash by central banks around the world.

Some economists and a senior member of the ECB's own governing council have voiced concern that the ECB's recent practice of buying debt issued by weaker eurozone countries such as Greece, Ireland and Portugal could fuel inflation, undercutting the core ECB mandate for stable prices.

Trichet argued that the ECB offsets any debt purchases by withdrawing cash from the eurozone banking system to "sterilise" the operation.

But ING senior economist Carsten Brzeski noted: "It is rather a pseudo sterilisation if banks can still get abundant liquidity at the ECB."

An ECB statement nonetheless stressed that "all the non-standard measures taken during the period of strong financial market tensions ... are fully consistent with our mandate and, by construction, temporary in nature."

The ECB chief refused to provide more information beyond what was already known -- the amount of money the bank has spent on debt purchases so far.

"Week after week you can see what we are doing. We don't give any additional information," Trichet said.

Analysts said his remarks suggested that he wanted to show that the ECB was not about to bow to pressure from markets, media or politicians as it carried out the controversial policy.

Critics say that by buying up such debt, the ECB effectively allows governments to raise fresh funds too easily and at the risk of stoking inflation pressures.

"The ECB today tried to recover its old poise," Brzeski said. "President Trichet was back in shape, being masterly reticent."

Analysts had hoped the bank would say which country's debt was being bought and how long the programme would last in order to stem speculation that has added to pressure on the euro and rising tension on interbank lending markets.

Trichet made no assessment of the single currency's present level around 1.20 dollars but stressed that "the euro is credible, keeps its value and is a major asset for domestic and exterior investors."

The central bank chief also stressed that there was "unusually high uncertainty" on the economic outlook, as he presented the latest forecasts by ECB staff for eurozone growth and inflation.

The 16-nation bloc should grow 1.0 percent this year and 1.2 percent in 2011, Trichet said, compared with previous forecasts of 0.8 percent and 1.5 percent.

Ernst & Young senior economist Marie Diron predicted however that some eurozone members would see zero or negative growth in the coming years.

"A number of countries are heading for a 'lost decade' (as in) Japan in the 1980s and 1990s," she said.

Inflation was forecast meanwhile at 1.5 percent this year and 1.6 percent in 2011, higher than the previous estimates of 1.2 percent and 1.5 percent.
 

Date created : 2010-06-11

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