European central banks stand pat

  • Thu, 04 Mar 2010 19:38:00 -0500 - 234Next
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The European Central Bank and the Bank of England left their benchmark interest rates unchanged at historic lows Thursday, as both worried about the strength of the economic recovery. The European Central Bank, which sets monetary policy for the 16 countries in the euro zone, left its benchmark interest rate at 1 per cent, where it has been since May. The bank believes that the euro-zone economy remains too weak to create an imminent danger of inflation. In Britain, which just barely emerged from recession last quarter, the Bank of England left its benchmark rate unchanged for a 12th month, at 0.5 percent. Fear of recession Bank of England’s committee members, meanwhile, are watching closely for any signs that Britain’s fragile economy could relapse into a recession. Gross domestic product rose 0.3 percent in the fourth quarter from the third quarter, the office for national statistics said last month, revising an earlier estimate upwards. “It’s pretty unlikely they’ll do anything for the next six months,” said James Knightley, an economist at ING in London. “The environment is still very uncertain. If the data continues to show a gradual improvement, they will just keep everything as it is.” The fear of rising unemployment and concerns about the sustainability of house prices, which remained relatively high, is prompting consumers to curb spending. Unemployment unexpectedly rose in January to the highest since 1997. Tight housing supply and low interest rates are expected to keep property prices from falling this year, the Royal Institute of Chartered Surveyors said Tuesday, easing some pressure on homeowners. Still, the availability of credit remained under pressure as some banks are concerned to meet any future regulatory requirements. Mortgage approvals dropped to the lowest level in eight months in January. Uncertainty about the outcome of the general election, which is expected to be held within the next three months, and whether the new government would push ahead with large-scale spending and job cuts in the public sector meant consumers were increasingly holding off big purchases. Yet, unsecured debt rose as Britain’s already indebted consumers borrowed more through credit cards and personal loans in January. The pound fell to the lowest in 10 months against the dollar on Monday before it started to recover on Wednesday amid concerns Britain might soon face a similar sovereign debt crisis to Greece. The Bank of England voted last month to halt its program to purchase government bonds and other debt to strengthen the economy but said it would not rule out continuing the program should the economy deteriorate again. The bank is expected to review its decision in May. Implication of too much available cash In the euro area, the European Central Bank president, Jean-Claude Trichet, and the bank’s governing council are cautiously draining the cash they began providing in October 2008 after the collapse of Lehman Brothers brought interbank lending practically to a standstill. The bank is concerned that too much available cash will fuel inflation or asset bubbles of the type that preceded the 2008 crisis. The central bank may be ready to return to competitive bidding to set the interest rate on three-month loans, which would raise costs for banks. But amid nervousness about Greek debt and signs that some institutions are still dependent on central bank funds, the bank is expected to continue providing unlimited financing on a shorter-term basis. The European Central Bank has already stopped making any more 12-month loans to the roughly 2,200 banks in the euro zone that are eligible. The bank said in December it will make the last round of six-month loans at the end of this month. The central bank had extended the time periods for loans beyond the customary three months to encourage institutions to continue lending to the private sector. The bank also allowed banks to borrow as much as they wanted at the benchmark interest rate, provided they could supply collateral. And it expanded the definition of the kinds of bonds and other securities it accepted as collateral. Analysts say they expect the European Central Bank to continue providing unlimited funds for one-week periods, to avoid a crunch as the longer-term loans expire. When Mr. Trichet holds a news conference this afternoon, analysts will be watching for any revision of bank staff estimates of euro-zone economic growth. Currently the bank projects growth in the euro zone of 0.8 percent this year and 1.2 percent in 2011.

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