ECB Expected To Hold Key Rate, Trichet To Detail Bond Buying Plan

on June 04 2009 7:07 AM

RTTNews - Thursday, the European Central Bank is widely expected to hold its key interest rate at a record low level, while the bank's President, Jean-Claude Trichet is set to detail the covered bond purchase plan announced in May.

In May, the ECB had lowered its benchmark interest rate to a new low of 1% as the 16-nation economy faces its worst recession since the World War II. Since this reduction, it was widely believed that the central bank will hold the rate for a long period. The ECB has lowered interest rates by a total of three and a quarter percentage points since early October 2008.

Along with the rate cut in May, Trichet had announced plans to buy covered bonds worth 60 billion euros, joining the Federal Reserve and other central banks in buying debt under their quantitative easing policies. He had noted that further details of the plan will be disclosed after today's Governing Council meeting. Most economists do not expect the ECB to expand the asset purchase scheme to include other types of assets for now.

The asset purchase scheme has invited criticism from German Chancellor Angela Merkel, who on Tuesday questioned global central banks, including the ECB, for adopting unorthodox measures to address the crisis. She urged a return to a policy of reason. There is also a lack of consensus among ECB policymakers regarding the size of asset purchases and the need for other unconventional measures.

Recent data revealed that euro area contracted the most since records began in 1995 on plummeting investment and exports. Gross domestic product contracted 2.5% in the first quarter following a 1.8% fall in the final quarter of 2008.

Annual inflation hit record low in May, raising deflationary concerns in the economy. On the other hand, unemployment in the Eurozone rose to its highest level in nearly ten years in April as the global economic downturn pulled a number of Europeans out of work.

However, recent manufacturing and services PMI surveys indicated that conditions are improving and the economy passed worst of the recession. A survey from the European Commission also showed that economic sentiment roe for the second straight month in May after reaching a historical low in March. Trichet also said there are some tentative signs of stabilization, albeit at very low levels.

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