European central banks keep rates on hold (2nd Roundup)

Oct 8, 2009, 15:52 GMT

Venice/London - Europe's leading central banks held interest rates at historic lows Thursday as they wait for evidence that the region's recovery from its steepest economic downturn in a generation is taking hold.

While the Frankfurt-based European Central Bank (ECB) left interest rates unchanged for the sixth consecutive month, the Bank of England (BoE) said in London that it was leaving borrowing costs unchanged at 0.5 per cent.

It was the seventh month in a row that the BoE has left rates on hold with the bank also deciding against extending its 175-billion-pound (279-billion-dollar) quantitative easing program.

The moves by both banks were in line with analysts' forecasts and followed signs of weak inflationary pressures and projections of subdued economic growth across Europe.

The meetings of the two European central banks came just days after Australia became the first member of the Group of 20 leading world economies to raise interest rates.

But holding one of its regular out-of-town meetings in Venice, the ECB kept interest rates at an historic low of 1 per cent with analysts believing both the ECB and the BoE will keep borrowing costs on hold well into the new year.

'With both the growth outlook and financial market conditions improving and core money supply stabilising the BoE decided no additional policy stimulus is required at this stage,'' said ING Bank economist James Knightley.

'We expect the BoE to start moving monetary policy to a less accommodative footing and favour late 2010 as being the likely timing of the first rate hike,' Knightley said.

Signalling that any monetary tightening in the 16-member eurozone remained a long way off, ECB chief Jean-Claude Trichet painted a cautious picture of the eurozone's economic prospects and warned about the risks caused by currency volatility - a reference to the euro's current strong performance.

'It's no time to declare victory,' said the ECB chief, who added that action was still needed to shore up market confidence in the face of 'exceptionally high' economic uncertainty and the threat of accelerating unemployment.

Thursday's interest rate announcements by the ECB and the BoE came one year after the two banks joined other top central banks in launching coordinated action to shore up global economic confidence in the wake of the implosion of the US investment bank Lehman Brothers.

Economists believe the eurozone returned to an economic growth path during the three months to the end of September after its two biggest economies - Germany and France - unexpectedly climbed out of recession during the second quarter.

However, Trichet warned: 'Recovery is expected to be rather uneven, supported by temporary factors.'

This includes the big fiscal stimulus plans rolled out by European governments over the last year aimed at countering the recession, which Trichet said should be rolled back in 2011.

In the runup to Thursday's ECB meeting, top eurozone officials have also been expressing worries about the steady rise in the euro, which has gained about 10 per cent since the early part of the year.

While a stronger euro might help to dampen imported inflationary pressures, it also increases the competitive pressures on the eurozone's key export sector.

Indeed, the euro jumped to a one-year high of more than 1.48 dollars early this week, and it climbed again Thursday in the wake of the ECB announcement.

Echoing remarks made by Group of Seven finance officials at the weekend, Trichet said: 'We consider that excess volatility and disorderly movements ... have adverse implications for economic and financial stability.'

Trichet also went on to again point to the US administration's backing for a strong dollar. Both sides of the Atlantic would 'co-operate as appropriate,' he insisted.