london: The European Central Bank and Bank of England both kept interest rates at record lows yesterday, but the ECB was more upbeat on economic growth while the BoE planned to pump billions more pounds into Britain’s recession-hit economy.
Benchmark rates remained at 1.0 percent for the eurozone and 0.5 percent for Britain. Speaking of the 16 euro nations, of which Britain is not a member, ECB president Jean-Claude Trichet said: “The latest information continues to signal an improvement in economic activity in the second half of this year.”
His comments sent the euro climbing to an 8-day high at 1.4919 though it subsequently edged lower. “At the margin, the ECB is starting to become more optimistic on the growth outlook,” Morgan Stanley economist Elga Bartsch said. Trichet also pressed eurozone governments to establish a “clear and credible exit strategy” to correct “high and sharply rising fiscal imbalances.”
In London meanwhile, the BoE said it would inject another £25bn ($41bn) into the economy in a further effort to stem a steep downturn. Under a procedure known as quantitative easing, the BoE has bought bonds from commercial institutions in hopes of encouraging lending to businesses and individuals.
Trichet warned that governments which have yet to present plans to get their books in order “could seriously risk undermining public confidence in the sustainability of public finances and the economic recovery.”
The central bank decisions were widely expected after the US Federal Reserve said Wednesday that it would hold its own rock-bottom interest rates steady for “an extended period” and kept trillion-dollar stimulus measures in place to support a fragile recovery there.
In Europe, the ECB has granted unlimited loans to commercial banks to boost credit flows, and media wondered whether the bank would announce in December that its next 12-month supply of central bank funds would be the last of that length.
It would mark the first step to undo exceptional measures supporting the eurozone economy. Trichet acknowledged that observers expected such a move and said: “I would say nothing to dispel this present sentiment of the market.”
Hitting a peak in June with loans of ¤442bn ($656bn) -- the largest volume of funds ever provided in a single step — the unlimited loan policy has helped lower interbank lending rates. The ECB statement noted that “not all our liquidity measures will be needed to the same extent as in the past.” The bank is to release updated growth and inflation forecasts compiled by its staff next month, and Trichet suggested they could be revised higher, while highlighting uncertainty regarding any outlooks.
At present, the bank expects economic activity to contract by 4.1 percent this year before expanding by a slight 0.2 percent in 2010. On Tuesday, the European Commission hiked its eurozone growth forecast to 0.7 percent next year and 1.5 percent in 2011 having previously predicted a contraction of 0.1 percent in 2010.
Inflation is tipped by ECB staff to come in at 0.4 percent this year and 1.2 percent in 2010, well below the bank’s target of just below 2.0 percent. Eurozone consumer prices have recently recorded falls but inflation would move back into positive territory next month, Trichet said.
He underscored ECB concern over governmental policy by stressing that “high public deficits and debts may complicate the task of the single monetary policy to maintain price stability.” Elsewhere, the Icelandic central bank said that it would cut its rate by one percentage point to 11 percent, after Norway unveiled a rate hike last week.
