Thursday, June 10, 2010

ECB leaves interest rates at 1%/Bank of England holds interest rates at 0.5%

ECB leaves interest rates at 1%
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2010
Published: June 10 2010 12:45 | Last updated: June 10 2010 12:45

The European Central Bank left its main interest rate unchanged at 1 per cent on Thursday as it sought to restore investor confidence in the eurozone while rebuilding its credibility with financial markets – and a sceptical German public.

The announcement, which was widely expected, leaves eurozone official interest rates at a record low for the 13th consecutive month, reflecting the eurozone’s weak growth and inflation prospects.

Atttention has focused instead in recent weeks on the ECB’s intervention in eurozone government bond markets and extensive programmes that are pumping unlimited liquidity into the 16-country region’s banking system.

Jean-Claude Trichet, president, faced criticism from international investors after last month’s ECB governing council meeting when he announced the purchase of government bonds just four days after saying such a move had not been discussed, after markets showed signs of panic.

The purchases, which last week reached €40.5bn and are thought to have involved mainly Greek bonds, are aimed at ensuring the functioning of bond markets. But Mr Trichet has also faced protests in Germany where Axel Weber, Bundesbank president, warned that the purchases would generate inflation risks and insisted that the scale of the programme should be strictly limited.

The sensitivities of the bond purchases will create a communications challenge for Mr Trichet when he gives a press conference in Frankfurt later on Thursday.

The ECB may also provide more details about the future of its “enhanced liquidity support” programme. Its gradual “exit strategy,” started late last year, was blown off course by the eurozone debt crisis, which led last month to the reintroduction of unlimited three- and six-month liquidity offers. The almost €850bn outstanding on ECB open market operations is near a record level. But at the beginning of July, €442bn in one-year loans granted a year ago will return to the ECB. J├╝rgen Stark, executive board member, has suggested that could be the point at which the ECB reverts to some kind of exit strategy.

Revised ECB forecasts could show eurozone inflation rising next year to within its target of an annual rate “below but close” to 2 per cent, on the back of higher oil prices and the effects of a weaker euro. The weaker euro is also helping to boost growth, offsetting the impact of harsher fiscal austerity measures being planned by eurozone governments. The ECB is wary about the pace of the economic recovery – but there are no signs yet of a second dip and it is expected to revise up its forecasts for gross domestic product this year.

Mr Trichet may be pressed to comment on the euro’s weakness. So far, however, there has been little sign that the ECB is worried about its fall.

Bank of England holds interest rates at 0.5%
By Norma Cohen
Copyright The Financial Times Limited 2010
Published: June 10 2010 12:02 | Last updated: June 10 2010 12:02

The Bank of England’s Monetary Policy Committee on Thursday voted to hold rates steady at their current record lows of 0.5 per cent and hold off on any measures to stimulate demand through its quantitative easing programme.

The move, widely expected by economists, comes after several months of inflation readings that were well above the MPC’s medium-term target of 2 per cent. Inflation, as measured by the Consumer Price Index, rose in April at an annualised rate of 3.4 per cent.

Moreover, a long-standing index of inflationary expectations, the BASIX Index from Barclays, the bank, showed the biggest jump since 1995. The Bank of England is set to release its own quarterly survey of inflation expectations on Friday.

However, in the latest edition of its quarterly inflation report, the Bank said that it believes the current rate reflects several one-off factors that are likely to gradually disappear from inflation readings. Among these are the persistent weakness of sterling and the reversion of VAT to its pre-recession level of 17.5 per cent.

But economists noted that the MPC may also be taking the prospect of a significant fiscal tightening into account when considering whether to move on rates. A sharp reduction in government spending could reverse some of the pick-up in economic activity seen in recent months, particularly if it leads to a significant rise in unemployment.

Indeed, Mervyn King, Bank of England governor, welcomed the new government’s plans to step up the pace of cuts in spending, saying the planned £6bn of spending cuts this year “would diminish some of the downside risks because of action to deal with the deficit. I think they are desirable to remove the risk of an adverse market reaction.”

The euro has fallen sharply in recent weeks as markets take account of the effect that individual member states will have on economic recovery in the region via their new-found urgency to deal with bloated government spending.

Copyright The Financial Times Limited 2010

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