ECB leaves interest rate on hold at 1%

ECB leaves interest rate on hold at 1%
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2010
Published: April 8 2010 12:46 | Last updated: April 8 2010 12:46
http://www.ft.com/cms/s/0/88b913fc-42f8-11df-96c4-00144feab49a.html


Eurozone official interest rates have been left unchanged on Thursday as the European Central Bank prepares its response to the escalating crisis over Greece’s public finances.

The ECB said its main interest rate would stay at 1 per cent for an 11th consecutive month. With eurozone growth and inflation remaining moderate, the announcement had been widely expected.

The decision will instead focus attention on the ECB’s stance on a possible Greek bail-out, and changes to the ECB’s system for providing liquidity to eurozone banks, due to be announced later on Thursday, which could offer Greece at least temporary relief.

Last month, Mr Trichet announced, that the ECB would abandon plans to return to minimum collateral requirements that prevailed before the global economic crisis. That will reduce significantly the chances of Greek assets becoming ineligible – which would have had disastrous consequences for the country’s banking system.

Still to be revealed, however, are details of a “sliding scale” by which the amount of liquidity provided by the ECB will vary according to the credit rating of assets provided as collateral. That could eventually increase the pressure on “fiscal sinners” such as Greece – although the ECB will probably want to avoid any short-term disruption.

By its actions, the ECB could sway the outcome of the Greek crisis – taking the central bank further than before into overtly political decision making, even if Mr Trichet argues it is acting solely in the eurozone’s interests.

Financial markets, meanwhile, believe ECB interest rates are firmly on hold. Eurozone annual inflation rose in March to 1.5 per cent, the highest since December 2008, but remains below the ECB’s target of an annual rate “below but close” to 2 per cent.

The ECB expects underlying inflationary pressures to remain moderate – especially with the region only slowly recovering from its worst downturn since the second world war.

Underlining the fragility of the eurozone’s economic recovery, retail sales in the 16 country region fell by 0.6 per cent in February, according to Eurostat, the European Union’s statistical office. That extended a 0.2 per cent drop in January and reflected still-weak consumer demand.

Separately, German industrial product figures disappointed, with output in February remaining unchanged compared with January, which had seen only a 0.1 per cent increase. But activity was hit by the severe winter weather and economists drew comfort from much stronger increases in German industrial orders recently.