RTTNews - Thursday, the European Central Bank maintained its key interest rate at a record low level for the third straight month as risks to economic outlook are now balanced.
In its Governing Council meeting held in Frankfurt, the ECB left its key interest rate, which is the interest rate on the main refinancing operations, untouched at 1%. The decision was in line with economists' expectations. The last change in the key interest rate was in May, when the bank cut the rate by 25 basis points to its current level. The bank has lowered the key interest rate by a total of three and a quarter percentage points since early October 2008.
The central bank also retained its interest rate on the marginal lending facility at 1.75% and that on the deposit facility at 0.25%.
The euro remained stable against its major rivals following the announcement. As of 7.45 a.m. ET, when the decision was announced, the euro was worth 1.4382 against the U.S. dollar, 137.37 against the yen, 1.53 against the franc and 0.8536 per pound.
The bank's President Jean-Claude Trichet, who said last month that current interests are appropriate, and Vice President Lucas Papademos are set to hold their post-decision press conference at 8.30 a.m. ET.
Most economists do not expect Trichet to unveil new policy stimulus this time. The central bank would probably be assessing the impact of the record bank lending and the covered bond purchase programme.
In June, the ECB lent a record EUR 442 billion for banks for 12 months and said it will hold two more 12-month tenders this year. Last month, the central bank started buying EUR 60 billion worth covered bonds to boost lending.
But, the ECB's bank lending survey for the second quarter revealed that banks are still tightening their credit standards, but the percentage has decreased compared to the first quarter. According to survey 21% of banks tightened their credit standards for lending to enterprises in the second quarter, down from 43% in the first quarter. Also, 22% of lenders tightened their credit standards for house purchases, down from 28% in the first three months.
However, the survey found that banks expect the net tightening of credit standards applied to loans to households to weaken somewhat further in the third quarter of 2009. Policy stimulus measures would making lending comfortable in the months ahead.
Recent surveys suggest that confidence is returning to the economy. The composite purchasing manger's index that measures private sector activities improved for the fifth month in July, indicating that the contraction is losing pace. A monthly survey by the European Commission showed that economic sentiment in the euro area rose for the fourth straight month in July.
Eurozone inflation is expected to remain negative for some time. In June, euro area inflation turned negative for the first time on record and continued the trend in July. According to an advance estimate from the Eurostat, consumer prices fell 0.6% year-on-year in July following a 0.1% drop in June. The ECB aims at inflation rates below, but close to 2% over the medium term.
The economy contracted at a record pace of 2.5% in the first quarter. The International Monetary Fund forecasts the Eurozone economy to contract 4.8% this year.
Also on Thursday, the Bank of England decided to hold its key interest rate at a record low and to raise the size of quantitative easing measures. The BoE voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The rate now stands at the lowest since the central bank was established in 1694.
The MPC also decided to raise the size of the asset purchases using the central bank reserves by GBP 50 billion to GBP 175 billion.
Elsewhere, the Czech National Bank unexpectedly reduced its key interest rate to the lowest level on record. The central bank cut its two-week repo rate by 25 basis points to 1.25%. Economists had forecast the bank to hold the rate at 1.5%.
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