ECB Keeps Key Rate at Record-Low 1%

The European Central Bank kept its benchmark interest rate at a record low of 1 percent today after first signs of an economic recovery emerged.

President Jean-Claude Trichet also said the ECB will start its plan to buy 60 billion euros ($85 billion) of covered bonds in the primary and secondary markets next month.

The 22-member Governing Council has been split over whether to follow the Federal Reserve and Bank of England, which have cut their key rates close to zero and are buying government and corporate bonds to tackle the worst recession in six decades. The debate over how far the ECB should go reached the highest level of European government this week, with German Chancellor Angela Merkel backing the Bundesbank’s view that asset purchases are a step too far.

Bundesbank President Axel Weber argues there is no real risk of deflation and buying assets to flood the economy with money is an unnecessary risk that could sow the seeds of future crises. Officials from smaller nations such as Slovenia’s Marko Kranjec and Cyprus’s Athanasios Orphanides are less certain and have indicated the ECB could buy a broader range of assets to fight the recession.

The ECB’s bond plan is worth 0.6 percent of euro-region gross domestic product. By contrast, the asset-purchase programs of the Fed and Bank of England amount to about 12 percent and 10 percent of their respective economies.

ECB Keeps Key Rate at Record-Low 1%, Bloomberg
6/4/2009 10:09:15 AM