The European Central Bank has kept interest rates at 1 percent for the 16th consecutive month as a still-uncertain global outlook clouds optimism about the eurozone’s recovery. The ECB’s decision Thursday to leave its benchmark refinancing rate at a record low, where it has stood since May 2009, was widely expected.
The ECB’s Governing Council set the benchmark lending rate at 1 percent 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 U.S. recession threatens the euro region’s economic rebound, economists said. Trichet holds a press conference at 2:30 p.m. in Frankfurt.
“Will the ECB prolong full allotment? We are pretty confident that they will – at least until the end of the year,” said economists at Danske Bank in a note. “Financial markets are fragile and there is no good reason to ‘rock the boat’ before end-Q3 and before year-end, when liquidity tends to becomes more scarce,” they wrote.
Jean-Claude Trichet, president, is expected later on Thursday to announce the that the ECB will extend into 2011 its policy of matching in full eurozone banks’ demand for liquidity on a weekly, monthly and three-monthly basis.
However Strong German growth helped the 16-nation eurozone’s economy to grow 1 percent in the second quarter over the previous three months. However, that pace is likely to cool and fears about the U.S. recovery have grown.
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 U.S. slowdown pose risks to the outlook. Council member Axel Weber said in an Aug. 19 interview that the ECB should help banks through end-of-year liquidity tensions before determining early next year when to withdraw emergency measures.
Earlier Thursday, Sweden’s central bank hiked its key repo rate by 0.25 percentage point to 0.75%. The increase was in line with market expectations. The Swedish economy is continuing to show strong growth, while inflationary pressures are currently low, but are expected to increase as economic activity strengthens, the central bank said in a statement.
The ECB is likely to take some comfort from breakdown of eurozone gross domestic product data for the second quarter, published by Eurostat, the European Union’s statistical unit. The ECB is expected not to change the remaining special liquidity arrangements for banks that were introduced at the height of the financial crisis, as it is well aware that the cost of sorting out the government debt crisis in a number of countries in Europe will be heavy.
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