RTTNews - As expected, the European Central Bank or ECB on Thursday left its key interest rate unchanged at a record low for the second straight month as the 16-nation economy faces its worst recession since the Second World War.
In its Governing Council meeting held in Luxembourg, the ECB kept its key interest rate, which is the rate on main refinancing operations at 1%, where it has been from May. The bank also held its interest rate on marginal lending facility unchanged at 1.75% and the rate on deposit facility at 0.25%.
ECB President Jean-Claude Trichet, who said in June that the economy is still in uncharted waters, is expected to reveal further details of the EUR 60 billion bond purchase plan announced in May in his regular post-decision press conference at 8.30am ET. The ECB is expected to start buying EUR 60 billion of covered bonds this month to boost lending.
To ease strains in the banking sector, the ECB on June 24 injected EUR 442 billion into the financial system, the biggest amount it has ever given in a single auction. The decision was the latest in ECB's efforts to maintain proper functioning of the financial market amid the global economic crisis. The previous record-high allotment was in December 2007, when the bank pumped in EUR 348.6 billion.
The new liquidity injection came on the heels of calls for mopping up excess liquidity when the appropriate time comes. ECB Executive Board member Christian Noyer of France had said the bank must be ready to absorb excess liquidity as soon as necessary. Another ECB rate-setter, Germany's Axel Weber had said there is no need of additional stimulus now. But, Trichet had warned that there are still risks of a sudden emergence of unexpected financial turbulence.
Strengthening hope that the worst of the recession would be over soon, economic sentiment rose for the third straight month in June. Significant improvements seen in the purchasing mangers' indicators also suggested the same.
Inflation in the 16-nation economy turned negative in June for the first time on record, raising deflationary fears. In June's monetary policy introductory statement, Trichet had said Eurozone's annual inflation rates are projected to decline further and temporarily remain negative over the coming months, before returning to positive territory by the end of 2009. He is expected to reiterate the assessment in today's statement.
On June 23, ECB Executive Board member Lorenzo Bini Smaghi of Italy stated that there will not be inflation in Europe and said, We are here to prevent it.
The Eurozone unemployment rate rose to a ten-month high of 9.5% in May from April's 9.3% as some 273,000 people lost job n May, official data revealed Thursday. That brought the total number of unemployed to 15.01 million. Mirroring the prevailing sluggishness in demand for euro area's industrial products, new orders in April dropped at the steepest annual pace on record.
In other central bank actions on Thursday, Sweden's Riksbank unexpectedly lowered its key interest rate by 0.25 percentage point to a record low of 0.25% and said the rate is expected to remain at this low level over the coming year. In addition, the Executive Board of the Riksbank decided to offer loans totaling SEK 100 billion to commercial banks at a fixed interest rate and with a maturity of 12 months to ensure that monetary policy has the intended effect.
Elsewhere, the Central Bank of Iceland held its policy interest rate unchanged at 12% after lowering the rate by 100 basis points in June.
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