ECB Keeps Key Rate at 1%

The European Central Bank left its benchmark interest rate at a record low as policy makers weigh the risks of withdrawing emergency lending measures amid Greece’s fiscal crisis., Bloomberg 3/4/2010 9:37:58 AM

The Frankfurt-based ECB kept its key rate at 1 percent. President Jean-Claude Trichet has promised to give details on the next step in the ECB’s exit strategy when he holds a press conference at 2:30 p.m. today.

Greece’s soaring budget gap has roiled financial markets and sent bond yields surging in Spain and Portugal, whose deficits have also swelled in the wake of Europe’s worst recession since World War II. The crisis is undermining confidence in the euro area’s economic recovery and complicating the ECB’s plans to scale back the liquidity measures it introduced to nurse the region through the slump.

Trichet must avoid any hint that the ECB will prematurely end its unlimited cash support for euro-area banks, said Colin Ellis, an economist at Daiwa Capital Markets in London. It could spook markets, push up interest rates and make it more difficult for countries like Greece to finance its debt.”

Greece, which must replenish 20 billion euros of borrowing in April and May, today began selling 10-year bonds.

The cornerstone of the ECB’s program has been to provide banks with unlimited funding at its key rate in the hope they will lend it on to households and companies. The ECB has already said it will stop giving banks 12 and six-month loans to ensure they don’t become addicted” to the cheap cash.

Officials will today decide whether to extend the policy of unlimited allotment in its remaining seven-day, one-month and three-month refinancing operations beyond the current guarantee of April 13. Before the global financial crisis, banks were required to bid for funds in auctions.

Euro-area growth almost ground to a halt in the fourth quarter, the European Union confirmed today. Unemployment held at the highest level in more than 11 years in January and economic confidence unexpectedly weakened in February. The European Commission last month said the economy may fail to gather strength for most of 2010.

The cooling recovery is keeping a lid on prices, reducing the need for the ECB to tighten policy any time soon. Inflation eased to 0.9 percent last month from 1 percent in January. That compares with the ECB’s aim to keep inflation just below 2 percent.

ECB Keeps Key Rate at 1%