ECB to hold 1.0pc rate despite credit pain

August 6, 2009
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, FRANKFURT, Aug 6 – The European Central Bank was set to leave its main interest rate steady at a record low point of 1.0 percent on Thursday, analysts say, despite tight credit and concern the eurozone could be hit by deflation.

A poll of 46 economists by Dow Jones Newswires found all expected the ECB to leave its benchmark lending rate unchanged as policymakers take a summer break.

"There seems little doubt that the ECB will keep its rates stable," ING chief eurozone economist Peter Vanden Houte said in a research note.

In London, the Bank of England was tipped to leave its main rate at 0.50 percent, with experts unsure if it would extend exceptional credit-easing plans.

Economic activity has shown signs of picking up in the 16-nation eurozone and surveys of businesses and consumers also suggest its first recession is finally winding down.

But bank lending conditions have become more restrictive and consumer prices have fallen in June and July for the first time in the bloc as a whole.

"Key risks include the effect of the still weak banking sector and the contraction in lending as well as the possibility of outright deflation in the eurozone," Goldman Sachs economis Erik Nielsen said.

ECB president Jean-Claude Trichet was nonetheless expected to keep possible further interest rate cuts in reserve while the bank waited to see if exceptional measures taken so far help ease the economic slump.

"The ECB might as well have skipped this meeting, as there is little reason to change course now," Houte said.

"It has already made it clear that it has no intention to cut the refi rate beyond the 1.0 percent level."

Natixis economist Cedric Thellier said that "the ECB will fall behind the curve by maintaining that floor from now on."

The US Federal Reserve and Bank of Japan have lowered their main interest rates to almost zero and have implemented special programmes to pump hundreds of billions of dollars and yen into the financial system.

ECB governors have also supplied unlimited amounts of cash to the eurozone banking system and have pledged to buy 60 billion euros (85 billion dollars) worth of low-risk corporate bonds to unblock a crucial business credit market.

But its latest survey of commercial banks found many would still tighten credit conditions owing to concerns over poor business prospects and to bolster bank balance sheets as they look to emerge from a dogged financial crisis.

Annual growth of loans to the private sector fell to a record low of 1.5 percent in June.

Like many of his peers however, Houte at ING expected the ECB to "reinforce the message of lasting stability.

"Events are playing out nicely for the ECB, with the first signs of a recovery, in combination with low inflation, justifying its current monetary stance," he said.

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