ECB, BoE Leave Interest Rates Unchanged

Published January 12, 2012 1:00PM (EST)

FRANKFURT, Germany (AP) — The European Central Bank left its key interest rate unchanged at 1.0 percent on Thursday as it plots its next steps in fighting the continent's government debt crisis.

Thursday's decision by the ECB's 23-member governing council follows two months with rate cuts aimed at spurring lagging growth, and a decision in December to inundate banks with cheap credit in an effort to shore them up against the financial turmoil from the debt crisis.

Bank President Mario Draghi will get questions at a news conference about his outlook and any clues about whether the bank could cut rates further in coming months. The ECB has never taken its benchmark rate below 1.0 percent in its 13-year history.

Britain's Bank of England also left its key rate unchanged at 0.5 percent on Thursday.

Many economists expect the 17-country eurozone to go through at least a mild recession that could have started in the last three months of 2011. Rate cuts can spur growth by lowering borrowing costs for businesses.

A shrinking economy would make it harder for indebted countries, such as Italy, to reduce their debt levels and undermine the willingness and ability of the better-off countries, such as Germany and France, to help them.

Economists are of different opinions about whether 1 percent will remain a rock bottom floor for the ECB, or whether it will eventually join the United States Federal Reserve and the Bank of England in pushing rates closer to zero. The Fed's key rate is between zero and 0.25 percent.

Many economists think Europe could already be in a mild recession. Growth figures for the fourth quarter of last year are not due until Feb. 15. The question is, how deep will any down turn be. Some recent indicators such as German exports — important to the eurozone's biggest economy — have improved while others have steadied, suggesting any slowdown might not be as rapid as feared.

That sense gives the bank time to wait and see how its two rate cuts and the bank credits are working before taking further steps.

Other issues for Draghi's news conference include the state of the eurozone banking system. The ECB last month offered cheap, long-term loans aimed at letting shaky banks lock up the financing they need for up to three years. That offer was taken up by 523 banks that borrowed euro489 billion ($622 billion).

But some of that money has been simply recycled back to the ECB in the form of overnight deposits at low interest rates, indicating that banks were reluctant to lend because they were concerned they would not be paid back. Some banks remain dependent on the ECB for funding to operate day to day.

Another is the bank's program to buy government bonds in the secondary market. That step is aimed at helping keep interest yields down for Italian and Spanish debt. The ECB has said that the program is limited in size and amount, and analysts think it will repeat that stance Thursday.

The bank has made clear that it is up to governments to reduce their deficits and improve growth so that they will be seen as good credit risks and be able to borrow affordably.

Still, a number of economists think that the ECB may eventually be forced to buy larger amounts of bonds to prevent a debt default by a larger eurozone economy such as Italy, the current focus of the crisis. Greece, Portugal and Ireland, which are much smaller, have already been bailed out.

Draghi may also be asked about Greece's efforts to convince bond holders to accept a 50 percent reduction in the value of their investments as part of a second, euro130 billion ($165 billion) bailout from the eurozone countries and the International Monetary Fund. The bailout is needed to avoid defaulting on the countries' bonds.

By Salon Staff

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