Thursday February 5, 01:49 PM
ECB holds interest rate at 2.0%, BoE cuts to 1.0%
By William Ickes
FRANKFURT (AFP) - The European Central Bank kept its key interest rate steady at 2.0 percent Thursday while the Bank of England cut its own benchmark rate by a half percentage point to a record low of 1.0 percent.
British interest rates were at the lowest point since the bank was created in 1694 -- 315 years ago.
In Frankfurt, economists had expected the ECB governing council to pause in a cycle of rate cuts that has seen the eurozone's main lending rate fall by 2.25 points in four stages since October to their present historic low point.
Analysts will now focus on a press conference by bank president Jean-Claude Trichet for signs the ECB could go below its present all-time low, possibly to 1.50 percent, next month.
Such a decision would be underpinned by a widely-anticipated downward revision to ECB staff forecasts for inflation and growth on March 5.
"We expect him (Trichet) to concede at today's press conference that economic conditions have taken yet another turn for the worse and inflation risks are shifting to the downside," Capital Economics economist Jennifer McKeown said.
Bank of America (NYSE: IKJ - news) economist Gilles Moec told AFP after the decision was announced that he would be "on alert to hear anything about quantitative easing or unconventional monetary policy measures."
Quantitative easing, a rising topic of speculation, is the creation of money to buy assets, another way for the bank to encourage economic activity, and a path the US Federal Reserve is considering as well.
Moec also thought Trichet "will have to acknowledge some kind of credit squeeze has started in the eurozone."
But maybe as a way of deflecting questions on quantitative easing, the economist thought Trichet might call for less pressure on commercial banks with respect to capital requirements they must hold with central banks, to free up funds for more lending.
"It would make sense to relieve the pressure for higher capital in order to make sure that credit orgination continues" to the wider economy, Moec said.
Nomura analyst Laurent Bilke also thought "the ECB could embark in some form of credit easing" other than rate cuts.
McKeown felt however that the ECB "might struggle to implement non-conventional policies to reduce longer-term interest rates."
The bank (NASDAQ: TBHS - news) 's latest decision came against a backdrop of persistently gloomy economic prospects for the 16-nation eurozone, which is in the midst of its first recession.
A key measure of business activity improved slightly last month, but the purchasing managers' index (PMI) compiled by data and research group Markit remained well below the 50-point level that signals contracting activity.
"Output could soon be falling at alarmingly rapid annual rates of close to 15 percent," a Capital Economics research note warned.
Trichet has already warned that the March growth outlook would probably be revised sharply lower from the current midpoint forecast of a 0.5 percent contraction.
The European Commission estimates that the eurozone economy could shrink by 1.9 percent this year.
Inflation has also fallen sharply however, to 1.1 percent, as the global economic slump contributed to a collapse in oil prices, taking it well below the ECB's target of just below 2.0 percent.
Inflation should bottom out later this year, with some analysts forecasting a quick dip into deflationary territory, though most agree the central bank will not follow US and Japanese counterparts by assuming a so-called zero interest rate policy, or ZIRP, in response.
Trichet is likely to "insist once again on the fact that the deflationary risk is low in the eurozone in the medium term so that ZIRP is of no consideration for the ECB," Natixis (Paris: FR0000120685 - news) eurozone economist Cedric Thellier said.
Another key focus of observers was on how low the ECB will eventually take its benchmark rate.
Following a cut in March, "in time-honoured fashion, softer data on growth and inflation could then trigger a debate about further modest easing to a trough of 1.0 percent" by mid 2009, Bank of America senior economist Holger Schmieding said.
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