ECB keeps rates unchanged and waits for March results

The European Central Bank has kept its interest rates unchanged at 2.0%. ECB President Jean-Claude Trichet is set to give a press conference where he may say whether the ECB could go below its present all-time low next month.


AFP - The European Central Bank kept its key interest rate steady at 2.0 percent Thursday while the Bank of England cut its own benchmark rate by a half percentage point to a record low of 1.0 percent.

British interest rates thus remained at the lowest point since the bank was created in 1694 -- 315 years ago.

In Frankfurt, economists had expected the ECB governing council to pause in a cycle of rate cuts that has seen the eurozone's main lending rate fall by 2.25 points in four stages since October.

The ECB also left its two other reference rates -- the deposit rate and the marginal lending rate -- unchanged at 1.0 percent and 3.0 percent respectively.

Analysts will now focus on a scheduled press conference by bank president Jean-Claude Trichet for signs the ECB could go below its present all-time low, possibly to 1.50 percent, next month.

Such a decision would be underpinned by a widely-anticipated downward revision to ECB staff forecasts for inflation and growth on March 5.

"We expect Trichet to concede during the press conference that the recession is deepening and price pressures have receded," Capital Economics economist Jennifer McKeown said.

Bank of America senior economist Holger Schmieding added that Trichet could "suggest that a rate cut in March is likely but not a done deal yet."

In January, Trichet said that "the next important rendezvous would be in March."

The bank's latest decision came against a backdrop of persistently gloomy economic prospects for the 16-nation eurozone, which is in the midst of its first recession.

A key measure of business activity improved slightly last month, but the purchasing managers' index (PMI) compiled by data and research group Markit remained well below the 50-point level that signals contracting activity.

"Output could soon be falling at alarmingly rapid annual rates of close to 15 percent," a Capital Economics research note warned.

Trichet has already warned that the March growth outlook would probably be revised sharply lower from the current midpoint forecast of a 0.5 percent contraction.

The European Commission estimates that the eurozone economy could shrink by 1.9 percent this year.

Inflation has also fallen sharply however, to 1.1 percent, as the global economic slump contributed to a collapse in oil prices, taking it well below the ECB's target of just below 2.0 percent.

Inflation should bottom out later this year, with some analysts forecasting a quick dip into deflationary territory, though most agree the central bank will not follow US and Japanese counterparts by assuming a so-called zero interest rate policy, or ZIRP, in response.

Trichet is likely to "insist once again on the fact that the deflationary risk is low in the eurozone in the medium term so that ZIRP is of no consideration for the ECB," Natixis eurozone economist Cedric Thellier said.

Growing attention is being paid meanwhile to the prospects of quantitative easing, or the creation of money to buy assets, as another way for the bank to encourage economic activity, a path the US Fed is considering.

"The ECB could embark in some form of credit easing" other than rate cuts, suggested Nomura analyst Laurent Bilke.

McKeown felt the ECB "might struggle to implement non-conventional policies to reduce longer-term interest rates" however, noting that "the purchase of government debt would prove particularly tricky."

A second focus of observers was on how low the ECB will eventually take its benchmark rate.

Following a cut in March, "in time-honoured fashion, softer data on growth and inflation could then trigger a debate about further modest easing to a trough of 1.0 percent" by mid 2009, Schmieding said.

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