ECB, BoE keep rates unchanged

January 13, 2011

, FRANKFURT, Jan 13, 2011 – The European Central Bank and Bank of England kept key lending rates unchanged on Thursday as Italy and Spain successfully sold bonds and the French premier vowed that the 17-nation eurozone would not fail.

In Frankfurt, the ECB kept its main lending rate at a record low 1.0 percent for the 20th month running, while the BoE held steady at its record low of 0.50 percent.

Analysts had widely anticipated the rate decisions and waited for news on the ECB\’s programme of public debt purchases following a string of bond issues by Italy, Portugal and Spain, countries seen as at risk on the money markets.

That and potential developments regarding the European Financial Stability Facility (EFSF) were the "two questions high in people\’s minds," Barclays Capital economist Thorsten Polleit told AFP after the decision was announced.

Capital Economics counterpart Ben May wondered whether the ECB would provide more clues at a press conference "about how it will deal with the peripheral eurozone debt crisis."

Spain passed a key test with its first bond auction of 2011, selling 3.0 billion euros ($3.9 billion) in five-year bonds while Italy raised 6.0 billion euros via five- and 15-year bond sales a day after Portugal raised 1.25 billion euros.

Analysts stressed that the sales did not spell an end to the eurozone debt crisis and pointed to tens of billions of euros that would still have to be raised by heavily indebted countries later this year.

In London, French Prime Minister Francois Fillon said: "Of this there must never be any doubt — euro area states, and especially France and Germany, are ready to do everything, absolutely everything, to ensure the euro area\’s stability."

The ECB has helped indebted countries by buying government bonds on secondary markets and providing unlimited amounts of cash loans to the commercial banks, some of which have become "addicted" to the funds in the words of many economists.

But ECB president Jean-Claude Trichet has become more and more outspoken in telling eurozone governments to get their finances in order, saying they must do more rather than rely on the ECB to save the day with its bond purchases.

Trichet told German lawmakers last week that the ECB\’s "monetary policy responsibility cannot substitute for government irresponsibility."

Germany is the strongest eurozone member and many politicians here oppose providing more money to weaker partners who have failed to take the painful measures needed to put their finances in order.

Media reports nonetheless suggest that Berlin is coming around to an eventual increase in the size of the 440-billion-euro EFSF, a vehicle that could eventually take over sovereign bond purchases from an increasingly reticent ECB.

Europe could also get help from China and Japan which have pledged to support the eurozone by buying eurozone countries\’ bonds.

Portugal and Spain have both insisted they will not need to ask the EFSF for help and pointed to the bond sales this week as supporting evidence.

UniCredit strategist Chiara Cremonesi said: "The good result at the Spanish auction sent a message similar to (Wednesday\’s) Portuguese auction — demand is solid but at the cost of higher yields" or interest rates on the loans.

The auctions helped to calm tensions on financial markets but economists remained cautious and noted the ECB would also have to deal with diverging growth among eurozone members and rising inflation.

The central bank\’s primary mandate is to keep inflation just below 2.0 percent, a level it breached in December at 2.2 percent.

A Barclays Capital research note said: "For the ECB, the most important issue to confront is likely to be some upward revision in its 2011 inflation outlook."

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