Thursday June 4, 12:53 PM
ECB, BoE hold record low rates
By William Ickes
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FRANKFURT (AFP) - The European Central Bank (ECB) and Bank of England held to record low key interest rates on Thursday, while markets looked for unconventional moves to pull the eurozone and British economies out of deep recessions.
The ECB held its rate at 1.0 percent and the Bank of England at 0.50 percent.
Despite steep interest rate cuts in the past year, eurozone credit has become tighter because commercial banks have not passed on much of the unlimited cash now at their disposal at record low rates.
ECB president Jean-Claude Trichet was to present details of an ECB plan to purchase 60 billion euros' (85 billion dollars') worth of low-risk bonds at a press conference following the decision.
That move was designed to boost a key credit market for companies that has remained clogged amid the global financial crisis and the eurozone's unprecedented recession.
Observers are also keen to hear how Trichet and the governing council will pay for the bond purchases, either by printing new money, or by "sterilising," or offsetting the operation through the sales of other assets, for example.
"The issue of sterilisation and any hints of the possibility that the programme may be extended in terms of quantity and types of assets are key," UniCredit (Milan: UCG.MI - news) analysts said.
The ECB left two other reference rates, the marginal lending rate and the deposit rate, unchanged as well at 1.75 percent and 0.25 percent, respectively.
Latest ECB staff forecasts for growth and inflation were also due after the rate decision, with the 2009 growth estimate likely to be revised sharply lower following a disastrous first quarter.
The 16-nation economy contracted by a record 2.5 percent from the last three months of 2008 and by 4.8 percent from the first quarter of last year, official data showed on Wednesday.
That was the sharpest downturn since records began in 1995, the Eurostat statistics agency said, and meant the eurozone has now endured four straight quarters of economic recession.
Unemployment reached a 10-year high of 9.2 percent in April meanwhile after rising for the 13th month running.
Given such weakness, IHS Global Insight expected the ECB to keep its main rates on hold until well into 2010, chief European economist Howard Archer said.
"It's also very possible that the ECB could ultimately extend and widen its asset purchasing scheme" if signs that the recession was easing prove premature and if deflation risks increased, he added.
The amount of ECB bond purchases is small compared with schemes established by the US Federal Reserve and Bank of England.
They are set to spend 300 billion dollars (210 billion euros) and 125 billion pounds (145 billion euros, 178 billion dollars), respectively, and also to buy government bonds, effectively underwriting government deficits.
That caused German Chancellor Angela Merkel to issue a rare critique Tuesday, as she called for a "return to a policy of having independent central banks."
Others charge that the ECB has been too timid in fighting the recession and have urged the central bank to pump more money into the economy.
ECB policymakers resist anything that might drive up inflation however, and even though consumer prices were essentially unchanged in May, have avoided moves that could not be reversed quickly once the economy begins to expand again.
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