The European
Central Bank and the Bank of England left their benchmark interest
rates unchanged at historic lows Thursday, as both worried about the
strength of the economic recovery.
The European
Central Bank, which sets monetary policy for the 16 countries in the
euro zone, left its benchmark interest rate at 1 per cent, where it has
been since May. The bank believes that the euro-zone economy remains
too weak to create an imminent danger of inflation.
In Britain, which
just barely emerged from recession last quarter, the Bank of England
left its benchmark rate unchanged for a 12th month, at 0.5 percent.
Fear of recession
Bank of England’s
committee members, meanwhile, are watching closely for any signs that
Britain’s fragile economy could relapse into a recession. Gross
domestic product rose 0.3 percent in the fourth quarter from the third
quarter, the office for national statistics said last month, revising
an earlier estimate upwards.
“It’s pretty
unlikely they’ll do anything for the next six months,” said James
Knightley, an economist at ING in London. “The environment is still
very uncertain. If the data continues to show a gradual improvement,
they will just keep everything as it is.”
The fear of rising
unemployment and concerns about the sustainability of house prices,
which remained relatively high, is prompting consumers to curb
spending. Unemployment unexpectedly rose in January to the highest
since 1997.
Tight housing
supply and low interest rates are expected to keep property prices from
falling this year, the Royal Institute of Chartered Surveyors said
Tuesday, easing some pressure on homeowners. Still, the availability of
credit remained under pressure as some banks are concerned to meet any
future regulatory requirements. Mortgage approvals dropped to the
lowest level in eight months in January.
Uncertainty about
the outcome of the general election, which is expected to be held
within the next three months, and whether the new government would push
ahead with large-scale spending and job cuts in the public sector meant
consumers were increasingly holding off big purchases. Yet, unsecured
debt rose as Britain’s already indebted consumers borrowed more through
credit cards and personal loans in January.
The pound fell to
the lowest in 10 months against the dollar on Monday before it started
to recover on Wednesday amid concerns Britain might soon face a similar
sovereign debt crisis to Greece. The Bank of England voted last month
to halt its program to purchase government bonds and other debt to
strengthen the economy but said it would not rule out continuing the
program should the economy deteriorate again. The bank is expected to
review its decision in May.
Implication of too much available cash
In the euro area,
the European Central Bank president, Jean-Claude Trichet, and the
bank’s governing council are cautiously draining the cash they began
providing in October 2008 after the collapse of Lehman Brothers brought
interbank lending practically to a standstill.
The bank is
concerned that too much available cash will fuel inflation or asset
bubbles of the type that preceded the 2008 crisis.
The central bank
may be ready to return to competitive bidding to set the interest rate
on three-month loans, which would raise costs for banks. But amid
nervousness about Greek debt and signs that some institutions are still
dependent on central bank funds, the bank is expected to continue
providing unlimited financing on a shorter-term basis.
The European
Central Bank has already stopped making any more 12-month loans to the
roughly 2,200 banks in the euro zone that are eligible. The bank said
in December it will make the last round of six-month loans at the end
of this month.
The central bank
had extended the time periods for loans beyond the customary three
months to encourage institutions to continue lending to the private
sector. The bank also allowed banks to borrow as much as they wanted at
the benchmark interest rate, provided they could supply collateral. And
it expanded the definition of the kinds of bonds and other securities
it accepted as collateral.
Analysts say they
expect the European Central Bank to continue providing unlimited funds
for one-week periods, to avoid a crunch as the longer-term loans expire.
When Mr. Trichet
holds a news conference this afternoon, analysts will be watching for
any revision of bank staff estimates of euro-zone economic growth.
Currently the bank projects growth in the euro zone of 0.8 percent this
year and 1.2 percent in 2011.
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