ECB keeps key interest rate at 1pc
European Central Bank kept interest rates at a record low today and President Jean-Claude Trichet may signal the bank will stay in crisis mode into next year.
The ECB’s Governing Council set the benchmark lending rate at 1pc for a 17th month, as predicted by all 57 economists in a Bloomberg News survey.
Policy makers are also likely to extend emergency lending measures for banks into 2011 as the risk of a renewed US recession threatens the euro region’s economic rebound, economists said.
“The ECB would like to end its extraordinary measures relatively soon but the situation is still too fragile to return to the exit path before year-end,” said Juergen Michels, chief euro-area economist at Citigroup in London. The euro was at $1.2828 shortly before the rate decision.
While the ECB will probably raise its growth forecasts today after Europe’s economy expanded at the fastest pace in four years in the second quarter, the sovereign debt crisis and a US slowdown pose risks to the outlook.
Council member Axel Weber said in an August 19 interview that the ECB should help banks through end-of-year liquidity tensions before determining early next year when to withdraw emergency measures.
Policy makers have so far committed to lend banks unlimited cash at the benchmark rate until at least October 12.
Weber said in the Bloomberg interview it would be “wise” to keep full allotment in weekly, monthly and three-month refinancing operations until after the end of the year, which is “usually surrounded by some uncertainty regarding the liquidity situation.”
The ECB in May abandoned the withdrawal of the lending measures, which were originally introduced to fight the global recession, as Greece’s debt crisis spread through Europe.
While most of the euro region’s 16-nation economy is now recovering, investors are still concerned about the finances of some member countries.
The premiums investors charge to hold Irish, Greek and Spanish debt over German bunds are wider than they were before a European Union-led rescue package was announced on May 10.
“Slowing foreign demand and renewed tensions in the periphery serve as warning signals that the ECB needs to err on the side of caution,” said Nick Matthews, an economist at Royal Bank of Scotland Group in London.
The ECB should “follow the Fed in terms of saying they will do anything necessary to counter the downside risks should they materialize.”
Contrast with Fed
The Federal Reserve announced on August 10 it will buy Treasuries to prevent its balance sheet falling below $2.05 trillion and keep interest rates from rising, saying US growth will be slower than anticipated.
By contrast, the euro region’s economy has surpassed forecasts, and Weber said the ECB’s projections are likely to be revised upwards when quarterly updates are published today.
The ECB in June predicted growth of 1pc this year and 1.2pc in 2011. The economy expanded 1pc in the second quarter from the first, driven by 2.2pc growth in Germany. The US economy’s comparable quarter-on-quarter growth rate was 0.4pc in the same period.
“There’s a contrast between the direction of travel, downgrading in the US and upside surprises in Europe,” said Peter Westaway, chief European economist at Nomura International in London, who expects the ECB to raise its growth forecast for this year to about 1.4pc. “Europe is surprising to the upside and recovering quite strongly.”
Sweden’s central bank today raised its benchmark rate for a second time this year, by a quarter of a percentage point to 0.75 percent.
Foreign sales are powering Europe’s recovery. In the second quarter, euro-area exports jumped 4.4 percent, the biggest gain since data were first compiled in 1995, the European Union’s statistics office in Luxembourg said today.
Still, European economic growth may slow as governments reduce spending to tackle bloated budget deficits and the global recovery shows signs of losing momentum.
Orders for durable goods in the US increased less than forecast in July, a sign one of the few remaining bright spots in the economy is cooling, while China’s industrial output growth weakened.
“Europe decoupling from the global economy would require domestic demand picking up the slack from the falling exports -- we are a good bit away from that,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam.
“I doubt we’ll be seeing decoupling this time round if the US is really in trouble. Europe is still too dependent on foreign trade.”