RTTNews - Thursday, the European Central Bank kept its key interest rate unchanged at a record low level as the 16-nation economy faces its worst recession since the World War II.
The Governing Council retained the interest rate on the main refinancing operations at 1% after cutting the rate by a quarter point in May from 1.25%. The decision matched economists' expectations. The ECB has lowered interest rates by a total of three and a quarter percentage points since early October 2008.
The central bank also left its interest rate on marginal lending facility untouched at 1.75% and the rate on the deposit facility at 0.25%.
The President of the ECB, Jean-Claude Trichet, is set to hold a press conference at 8.30am ET. He is expected to detail the covered bond purchase scheme announced in May.
Along with the rate cut decision 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.
ECB policy maker Gertrude Tumpel-Gugerell recently said that the bank had done everything possible with interest rates to boost the economy.
Official 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.
ECB Vice President Lucas Papademos had said during mid-May that despite a sharp downturn in the first quarter, the Eurozone economy is expected to kick-start recovery sooner than anticipated.
Annual inflation hit record low in May, raising deflationary concerns in the economy. Last week, Governing Council member Ewald Nowotny had said the central bank sees neither deflation nor high inflation in the foreseeable future. He said the risk of medium term inflation driving factors is generally low and controllable.
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 rose for the second straight month in May to six-month high, after reaching a historical low in March.
Earlier in the day, the Bank of England kept its Bank Rate unchanged at a record low of 0.5% and decided to continue with its asset purchase scheme worth GBP 125 billion. Meanwhile, Iceland's central bank lowered its key rate by 100 basis point to 12% and in Russia, the apex bank cut its refinancing rate by 50 basis points to 11.5%.
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