Monday 18 December 2017

ECB holds key interest rate at 1.5pc but scope for pre-Christmas cut

President of the European Central Bank (ECB) Jean-Claude Trichet. Photo: Getty Images
President of the European Central Bank (ECB) Jean-Claude Trichet. Photo: Getty Images reporters

The European Central Bank held interest rates at 1.5pc today but left the door open for a pre-Christmas drop.

A cut had been anticipated by some economists in a bid to boost European economies with the area suffering from slowing economic growth and some viewing another recession as inevitable.

But many still believe rates will be cut to by early next year giving a boost to cash-strapped homeowners.

After his last meeting as president of the ECB, Jean-Claude Trichet confirmed earlier expectations that the bank will offer banks new one year loans and reintroduce its covered bond purchases in a bid to add liquidity to the market.

He also recognised the ongoing tensions in stock markets but warned that banks must do what they can to fix their balance sheets and should also take advantage of Government support where it is made available.

Investors fear some European banks will have to take heavy losses on their exposure to Greek debt including Franco-Belgian municipal lender Dexia.

Greece is teetering on the brink of default and all the uncertainly means that banks are unwilling to lend to each other - reminiscent of the credit crisis of 2008.

Mr Trichet acknowledged that the eurozone economy is facing “intensified downside risks.”

The ECB is also under pressure after eurozone inflation unexpectedly rose to 3pc – the bank’s policy is to keep the rate at or below 2pc.

Mr Trichet, who will be replaced by Mario Draghi, the current Bank of Italy chief, on November 1 said that inflation risks are “broadly balanced.”

Earlier the Bank of England also kept rates unchanged at 0.5pc

But it also injected a further £75bn (€86bn) into the economy in a bid to jump-start the UK's flagging recovery in a sign it believes the country is slipping back into recession.

Its Monetary Policy Committee (MPC) voted to boost its quantitative easing (QE) programme - effectively printing more cash - from £200bn to £275bn despite the risks it poses to the country's inflation rate.

Meanwhile, Wall Street's Dow Jones Industrial Average edged ahead 0.3pc after the ECB comments on emergency lending for the banking sector.

The FTSE 100 Index in London rallied more than 2pc as traders digested the ECB's announcement, which came amid reports that European finance leaders were examining ways of recapitalising financial institutions.

The Dax in Germany moved 1.5pc higher and France's Cac-40 lifted more than 2pc as sentiment on the continent improved.

Hopes that leaders will act to support struggling banks prompted a surge in riskier stocks, such as the heavily weighted mining sector.

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