ECB Keeps Rate at 1%, May Weigh Second Run at Exit
ECB keeps interest rate at 1%
Hannelore Foerster/Bloomberg
ECB President Jean-Claude Trichet.
ECB President Jean-Claude Trichet. Photographer: Hannelore Foerster/Bloomberg
Aug. 5 (Bloomberg) -- Steven Major, global head of fixed-income research at HSBC Holdings Plc, talks about European Central Bank and Bank of England monetary policy. Major also discusses his strategy for Treasuries. Bill Hubard, chief economist at MIG Bank SA, also speaks with Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)
Aug. 5 (Bloomberg) -- Poul Thomsen, the International Monetary Fund's mission chief in Greece, talks about the country's ability to meet its commitments to the 110 billion-euro bailout package from the IMF and European Union. He speaks from Athens with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
The European Central Bank left interest rates at a record low as policy makers start to consider how to scale back the crisis-fighting measures introduced over the past two years.
The ECB’s Governing Council meeting in Frankfurt today set the benchmark lending rate at 1 percent for a 16th month, as predicted by all 51 economists in a Bloomberg News survey. The ECB will not raise its key rate until the third quarter of 2011, a separate survey showed. President Jean-Claude Trichet holds a press conference at 2:30 p.m.
The euro has rebounded 10 percent since June and stocks have jumped as the debt crisis that threatened to splinter the currency eases and the growth outlook improves. While economists say Trichet is unlikely to outline his exit plans until next month, a successful round of banking stress tests and Greece’s progress in cutting its budget deficit may prompt officials to discuss laying the groundwork for removing stimulus.
“The ECB is not going to do anything with interest rates for a long time,” said Stefan Bielmeier, chief economist at DZ Bank AG in Frankfurt. “Their minds are likely to be more on when and how to return to the exit strategy” for emergency liquidity measures.
Separately, the Bank of England left its main rate at 0.5 percent and kept its bond-stimulus plan at 200 billion pounds ($318 billion).
Stocks Jump
Europe’s Stoxx 600 Index has jumped 11 percent in the past month and the gap between Spanish 10-year government bonds and German debt of the same maturity has narrowed to 153 basis points after touching a euro-era high of 221 on June 16.
The spread on the debt of Greece, whose near-default sparked the turmoil in the region, is at 758 basis points, compared with a record 965 basis points on May 7. The International Monetary Fund said today that the country has shown “great progress” in getting to grips with its deficit.
As the euro-area economy gathers strength and the region’s bond market show signs of stabilizing, the ECB is already running down the emergency bond purchases introduced in May. The challenge for Trichet is to show how the ECB will scale back the supply of unlimited cash to banks without throttling the recovery.
Policy makers in May abandoned the withdrawal of measures deployed to fight the global recession as Greece’s crisis spread across Europe. The euro dropped 15 percent in the first half of the year and reached a four-year low of $1.1877 on June 7.
Liquidity Removal
The single currency has since recovered ground and the 6.7 percent gain against the dollar in July was its biggest monthly increase in more than a year.
The euro was little changed after the ECB announcement and was up 0.3 percent on the day to $1.3207 as of 13:48 p.m. in Frankfurt.
The ECB currently gives banks unlimited liquidity for periods of up to three months at its benchmark rate.
Banks can borrow as much money as they need for seven days and one month until at least Oct. 12. It will offer unlimited cash for three months until September. The ECB last year scaled back 12- and 6-month loans introduced after the collapse of Lehman Brothers Holdings Inc. in 2008.
Investors are already anticipating the ECB’s exit, fuelling a “steady rise” in interbank lending rates, said Matteo Regesta, a strategist at BNP Paribas in London. The rate that European banks charge each other for three-month loans has increased 20 basis points since the end of May, climbing to a one-year high of 0.9 percent today.
Risks
The ECB’s bond purchases, which split the Governing Council when they were started at the depth of the crisis in May, dropped to 81 million euros last week from 16.5 billion in the first week. The program has totalled 60.5 billion euros so far.
The risk for policy makers is that they tighten policy too soon just as government austerity measures to reduce budget deficits threaten growth.
Spanish unemployment rose to 20.1 percent in the second quarter, the highest in more than a decade, and euro-region export prospects were hurt when manufacturing growth in China slowed last month. The ECB today said Greece still faces “important challenges and risks.”
For now, the economy is still improving. German factory orders surged more than twice as much as analysts forecast in June, business confidence in Europe’s largest economy soared and growth in Europe’s services and manufacturing industries accelerated in July. Loans to households and companies grew at the fastest pace in 20 months in June.
ECB Outlook?
Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, on Aug. 4 reported its biggest profit in 2 1/2 years. Davide Campari-Milano SpA, the maker of Wild Turkey bourbon and Skyy vodka, said the same day that first-half profit jumped 15 percent, as sales rebounded in Europe and the U.S.
“The ECB could feel quite smug at the moment,” said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. “One, Trichet called the economy getting stronger and it has a little bit. And two, he played down the need for more intervention, and here we are.”
Still, the central bank’s policy has to “stay loose,” according to Major. “We’re a long, long way from things being fixed.”
To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net
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