European Central Bank Keeps Rate at Record Low

The European Central Bank left interest rates at a record low after Europe’s sovereign debt crisis forced it to start buying government bonds

Policy makers meeting in Frankfurt today kept the benchmark rate at 1 percent. ECB President Jean-Claude Trichet, is under pressure to give details on the bond purchases, which have split the bank’s Governing Council and failed to stem a rise in some countries’ borrowing costs.

Since the ECB announced its bond program on May 10 to restore normal functioning” on markets, the extra yield that investors demand to hold Spanish and Italian debt has advanced to euro-era highs. Portuguese and Irish yields have also risen after their initial drop. Trichet has given no information about how much the ECB plans to spend on government debt or which countries’ bonds the central bank is buying.

Critics say the purchases amount to bailing out indebted governments and could fuel inflation, breaching two of the ECB’s founding principles and undermining its credibility.

The move divided Trichet’s 22-member Governing Council, with Bundesbank President Axel Weber and Executive Board member Juergen Stark openly voicing concern.

The crisis has also forced the ECB to reverse its withdrawal of emergency stimulus measures and prompted economists to push back forecasts for higher interest rates until the second quarter of next year.

The ECB’s purchases, which totaled 40.5 billion euros on June 4, have slowed since it bought 16.5 billion euros of bonds in the first week of its program. It spent 5.5 billion euros last week, down from 8.5 billion euros the week before and 10 billion euros the week before that.

European Central Bank Keeps Rate at Record Low, Bloomberg
6/10/2010 10:14:53 AM