European rates set to stay at record lows
LONDON — Europe’s two leading central banks are expected to keep interest rates unchanged Thursday and damp down any talk that borrowing costs will soon rise in the wake of a surprise rate hike by Australia’s central bank.
Analysts say the European Central Bank, which controls monetary policy for the 16 countries that use the euro, and Britain’s Bank of England will keep benchmark interest rates unchanged at historic lows of 1 percent and 0.5 percent.
Unlike Australia, the eurozone and British economies remain in recession, though upcoming figures may show a modest pickup in growth over the final months of 2009.
In contrast, the Reserve Bank of Australia felt able to lift its main interest rate by a quarter percentage point to 3.25 percent amid mounting inflation concerns and a strong rebound in growth. Rate hikes are bankers chief weapon against inflation; low rates are used to spur growth in recessions.
And the International Monetary Fund says it expects only 0.3 percent for the eurozone next year. Even that would be welcome after a massive 4.2 percent slump in 2009 as exports, particularly from Germany, dwindled.
The European Central Bank itself expected 0.2 percent growth for 2010, revised up from its previous prediction of a 0.3 percent contraction.
That won’t be enough, analysts say, to push policymakers at the European Central Bank into any speedy decision to raise rates as inflationary pressures will likely remain benign given the extent of the output lost during the recession.
“We continue to believe the ECB remains very comfortable with notions of keeping the policy rate at a low level for a prolonged period of time,” said Royal Bank of Scotland economist Silvio Peruzzo.
“However, the rhetoric is likely to turn gradually more hawkish in recognition of the macroeconomic outlook, which is evolving more positively than the ECB expected,” he added.
Jean-Claude Trichet, the central bank’s president, has said that recovery should not be taken for granted and has warned about the uneven nature of the upturn as firms rebuild inventories and government programs to support the car industry end.
At his press conference following last month’s interest rate decision, Trichet said any rebound was “expected to be uneven” and that the “worst possible attitude” would be to conclude that it was “business as usual” now that financial markets were functioning much better.
Analysts said that was a clear statement from Trichet that interest rates are not changing any time soon.
“Consequently we, like most market participants, expect official rates to be on hold for a considerable time,” said Gordon Lowson, head of money markets at Standard Life Investments.
Trichet has since expressed concerns about the rising euro, which has the potential to lower upcoming economic growth by making exports more expensive.
Markets will be on the lookout for any euro-related comments from Trichet in his press conference following the rate decision.
The Bank of England is also expected to keep interest rates unchanged well into next year as well even though figures later this month are will likely show that the British economy returned to growth in the third quarter.
However, any growth will be modest in comparison with the lost output over the past several quarters. Even with growth in the third and fourth quarters, the IMF is forecasting that the British economy will shrink by 4.4 percent over 2009. It is also predicting that growth will be a tepid 0.9 percent for 2010.
More interest will center on whether the Bank of England will announce an extension of its financial purchases from the banks. At the moment, the central bank has a 175 billion facility to buy up financial assets from the banks to increase the money supply and get the banks lending again.
Most analysts think the Bank of England will hold back from requesting any more money despite weak bank lending and ongoing concerns about the country’s debt levels and ongoing sharp contractions in industrial output.
Any increase may be better explained in November when the Bank of England will be armed with its latest quarterly economic forecasts.
“While no change in policy is expected this week, the poor industrial production data have served as a reminder that the potential for more quantitative easing remains on the table for November,” said Jane Foley, research director at Forex.com.
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