European Central Bank leaves key interest rate at 1 percent for 17th straight month

Thursday, October 7, 2010

ECB leaves interest rate unchanged at 1 percent

BERLIN — The European Central Bank left its main interest rate unchanged at a record-low 1 percent for the 17th consecutive month on Thursday amid caution over the economic outlook.

The bank’s decision to leave its refinancing rate untouched, as it has since May 2009, was widely expected.

The 16-nation eurozone posted decent second-quarter economic growth but has seen a flare-up lately in fears over the debt troubles of Ireland in particular.

Still, that hasn’t troubled the euro, which has hit eight-month highs against the dollar on worries that the U.S. may be headed back into recession and expectations the Federal Reserve will announce new stimulus measures.

On Thursday, it nudged close to the $1.40 mark for the first time since February. That marks a turnaround from the 16-nation currency’s springtime tumble as markets fretted about the government debt crisis that spread from Greece — in mid-June, the euro hit a multiyear low of $1.1878.

ECB President Jean-Claude Trichet can expect to face questions on the euro’s strength at the post-decision news conference.

A stronger euro could hurt growth by making European exports less price-competitive — the last thing the eurozone needs as it digs its way out of the debt crisis.

Germany’s export-driven quarter-on-quarter growth of 2.2 percent in the April-June period led the eurozone to growth of 1 percent.

The head of Germany’s main industry federation, Hans-Peter Keitel, said last week that he didn’t expect the exchange rate to “constitute a danger” to exporters if it stays roughly in its recent range, but companies won’t be keen to see the euro climb further.

Trichet’s standard retort to questions over the value of the euro has been that he will say something when he has something to say. Analysts think this could be one of those times, given the debt problems and associated austerity measures facing many eurozone countries.

“We suspect that Trichet will subtly hint that the European authorities would not be happy with taking the lions’ share of the dollar adjustment in the foreign exchange market,” Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubishi UFJ, said ahead of Thursday’s rate decision.

Pressure from the prospect of new Fed stimulus action would be partly offset if the ECB took similar action — but there are no real signs that the ECB plans to do so.

In fact, recent comments from a number of policymakers at the bank have suggested the opposite, especially with regard to money market operations.

Earlier Thursday, the Bank of England has held interest rates steady at a record low of 0.5 percent for the 19th consecutive month as it waits for a clearer picture on economic recovery.

The bank also kept its 200 billion pound ($318 billion) asset-purchase program on hold — but pressure is rising for it to restart the so-called quantitative easing program to boost the money supply.

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