Thursday, July 8, 2010

ECB leave interest rates unchanged again

The European Central Bank left its benchmark interest rate unchanged at a record low of 1 percent for the 14th consecutive month on Thursday amid lingering concerns over the health of the continent's banking sector.
The ECB's governing council had been widely expected to leave its refinancing rate where it has been since May 2009. Economic growth in the 16-nation eurozone remains modest and inflation tame - fueling expectations the central bank will stay put for months to come.
After economic activity strengthened during the spring, eurozone gross domestic product is expected to keep growing at "a moderate and still uneven pace" ECB President Jean-Claude Trichet said in his opening statement to a post-decision news conference. Inflation rates should remain moderate next year, he added.
With rates on hold, Trichet was facing questions on banks' demand for cash and the upcoming publication of "stress tests" on European banks.
Market fears focus on concerns that banks are holding government bonds and other debt from financially troubled countries such as Greece, Portugal and Spain - and could be dragged into Europe's simmering government debt crisis.
To dispel such fears, European Union leaders have pledged to disclose the results of the "stress tests" designed to show how banks would do if circumstances worsen. Trichet welcomed that decision.
Results are to be published July 23. French Finance Minister Christine Lagarde has said they will show European banks are "solid and healthy."
The tests will cover 91 banks in Europe, which represent 65 percent of the European banking sector.
On Wednesday, the committee subjecting the banks to stress tests said it has widened the factors aimed at determining their financial health. That reinforced confidence in the results.
Last week brought signs of relief on another front as a record batch of unusual 12-month loans to banks expired smoothly. As the euro442 billion ($557 billion) in credit came due, the ECB said it would lend a lower-than-expected euro131.9 billion to banks for the next three months.
That suggested banks' cash needs are easing despite lingering worries about the impact of the eurozone debt crisis.
The outcome has helped lift the euro after a prolonged battering. The currency, which hit a four-year low below $1.19 on June 7, traded above $1.26 on Thursday.
Separately, the Bank of England left its base interest rate at a record low of 0.5 percent for the 17th straight month and left its asset purchasing program on hold. Britain's economic recovery remains fragile and public spending cuts are expected to hamper future growth.

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