Tags: EU | Europe | Interest | Rates

ECB Holds Rates, Halts Some Crisis Measures

Thursday, 04 Mar 2010 10:07 AM

The European Central Bank left its benchmark interest rate unchanged at 1 percent for the tenth month running Thursday and confirmed that it will keep scaling back crisis lending measures even though the economy in the 16 countries that use the euro is barely growing.

The Bank of England also decided to keep its main interest rate on hold at the record low of 0.5 percent and held back from asking the government for the ability to pump more cash into the economy. Figures last week showed that the British economy grew by more than initially thought — albeit at only a quarterly rate of 0.3 percent — in the last three months of 2009.

Both central banks are expected to keep borrowing costs unchanged for much, if not all, of this year, as the recovery from recession proves to be far from electrifying. The U.S. Federal Reserve has taken a similar stance, withdrawing some special measures but indicating rates are not going up soon.

While the Bank of England issued a limited statement, providing no explanation for its decision, the European Central Bank president Jean-Claude Trichet told a press briefing that the recovery in the eurozone was "on track" but likely to "remain uneven" — figures earlier confirmed that the economy grew by a paltry 0.1 percent in the last three months of 2009 as the recovery in Germany stalled and Italy contracted once again.

"Overall, the governing council expects the euro area economy to grow at a moderate pace in 2010, in an environment marked by continued uncertainty," Trichet said.

Trichet said the ECB expects growth this year to be between 0.4-1.2 percent, against December's forecast of between 0.1-1.5 percent. For 2011, the ECB expects growth of 0.5-2.5 percent, up from December's forecast of 0.2-2.2 percent.

Trichet also said price developments "remain subdued" and that the ECB expects inflation to be around 1 percent in the near-term, below the target of below, but close to 2 percent.

Despite the fairly modest economic recovery taking place in the euro zone, Trichet confirmed that the Bank will continue to get rid of cheap bank lending operations introduced when the financial crisis first exploded — these were designed to allow the commercial banks to have access to money at a time when the credit markets had seized up.

"The gentle exit continued with the ECB further phasing out its crisis liquidity measures," said Carsten Brzeski, senior economist at ING Belgium.

Trichet said the ongoing improvement in financial market conditions and the need to prevent distortions in the provision of credit were behind the decision to scrap a 6-month credit offering at the end of this month, and to return to the pre-crisis practice of offering shorter-term loans at a variable rate and not at the benchmark 1 percent rate.

However, Trichet insisted that support to the euro zone banking system remained generous, especially as the bank will continue to provide unlimited money in its one-week offering at the benchmark rate of 1 percent — at least until Oct. 12.

"All these measures aim to provide the banking sector with the necessary tools to ensure a smooth transition to more normal conditions in the money market," said Frederik Ducrozet, eurozone economist at Credit Agricole.

Trichet also praised Greece's latest set of budget cuts announced Wednesday and repeated his previous comment that the country's departure from the euro zone was an "absurd hypothesis."

He said the ECB was "making a very positive judgment" about Greece's decision Wednesday to slash its budget by a further euro4.8 billion this year and dismissed suggestions that the International Monetary Fund should play a more prominent role in the Greek crisis by stumping up cash.

"I do not trust it would be appropriate to have the introduction of the IMF as a supplier of help through standby or any kind of such help," Trichet said.

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The European Central Bank left its benchmark interest rate unchanged at 1 percent for the tenth month running Thursday and confirmed that it will keep scaling back crisis lending measures even though the economy in the 16 countries that use the euro is barely growing. The...
EU,Europe,Interest,Rates
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2010-07-04
Thursday, 04 Mar 2010 10:07 AM
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