Central banks hold rates, ECB to curb big loans (2nd Roundup)

Nov 5, 2009, 15:34 GMT

   Frankfurt - Major central banks are keeping low interest rates in place, but the European Central Bank said Thursday it would begin to curb an extraordinary programme of almost unlimited loans that has kept the euro zone flush with money.

ECB president Jean-Claude Trichet said the 'extraordinary liquidity measures' would be phased out gradually.

   The ECB governors decided to keep the key euro borrowing rate at its historic low of 1 per cent, which has been in force since May. On the same day, the Bank of England left the key sterling interest rates unchanged at 0.5 per cent.

   Dollar rates are also at an historic low, close to zero. The US Federal Reserve said Wednesday it was leaving them there. US economic conditions had 'continued to pick up' since its last meeting in September but were likely to 'remain weak for a time.'

While the Bank of England decided to pump an extra 25 billion pounds (41 billion dollars) into the British economy, the ECB signalled time was running out for a special programme of 12-month loans to banks which was designed to avert a major depression.

Trichet said those unconventional measures were no longer as necessary as they had been in the recent past. The third and last tender on such conditions would be organized next month.

Cheap money makes it easier for people and businesses to afford credit and encourages greater spending, which averts deflation.

   'The euro area is expected to recover at a gradual pace in 2010,' Trichet told a news conference. He said developments since ECB governors last met last month had confirmed their expectations.

Developments had confirmed their assessment of low inflationary pressure, he said. In October, euro zone retail prices fell by 0.1 per cent. But he said the outcome 'remains subject to high uncertainty.'

   Trichet issued an apparent warning to Chancellor Angela Merkel's new government in Germany, the zone's biggest nation, over its plans to cut income and sales taxes.

   'Tax cuts should only be considered over the medium term when countries have greater room for manoeuvre,' he said.

A panel of advisers to the German government warned Thursday that Germany's total taxation revenues would slump 6.7 per cent this year and a further 2.4 per cent next year because of the recession and altered tax rules, the Finance Ministry in Berlin said.

The Merkel government plans to change tax laws in a way that will reduce revenue for the federal, state and city governments by 7 billion euros next year. The shortfall must mainly be made up by borrowing.

The economy in the 16 nations that use the euro currency has shown some signs of picking up, but economists said it was plainly too early to shift rates higher since this could choke off a recovery and there was currently very little risk of inflation.

   Analysts have suggested the Frankfurt-based ECB may wait until the second half of next year before rates go back into climb mode.