European Central Bank puts end to interest rate hikes

AFP, Thursday 8 Sep 2011

Anxiety over the eurozone debt crisis leads bank to put the brakes on its cycle of rising interest rates, with any further rise likely delayed until next year

The European Central Bank effectively called a halt to its cycle of rising interest rates on Thursday amid anxiety over the eurozone debt crisis and slowing economic growth.

The ECB's policy-setting governing council voted to leave the rate for its main refinancing operations unchanged at 1.5 per cent at the bank's regular monthly meeting here, as expected.

Just 45 minutes earlier the Bank of England had also held borrowing costs, at a record low level of 0.50 per cent.

ECB President Jean-Claude Trichet is scheduled to explain the reasoning behind the decision at a news conference later.

But after tightening monetary conditions in the single currency area twice in the past six months -- in April and July -- analysts had forecast that the ECB would vote to keep rates steady as the debt crisis continues to rage, undercutting growth all across the euro area.

Not only has the economic outlook clouded over and investor morale is falling, but also fears that Greece is on the brink of bankruptcy persist.

And countries such as France, Italy and Spain are having to push through additional austerity measures to get their finances back on an even keel and reassure investors who buy their debt.

So, while just a month ago, ECB watchers had been pencilling in a further rate rise in the autumn or by the end of the year, the bank is now expected to hold fire for the time being.

And some observers suggest it could even start relaxing the monetary reins again if the situation begins to deteriorate more dramatically.

The ECB is scheduled to publish its latest staff projections for the entire eurozone later Thursday.

Data from individual states are far from encouraging.

In Greece, at the centre of the debt crisis, the economy shrank 7.3 per cent in the second quarter on a 12-month comparison, official data showed.

And in Portugal, gross domestic product (GDP) contracted by 0.9 per cent.

Those data "add to evidence that the recessions there will be more drawn out than either government expects, suggesting that both economies will struggle to meet their budget deficit reduction targets," said Ben May, European economist at Capital Economics.

In many ways, the ECB holds the master cards to the debt crisis because it is buying up bonds issued by those eurozone countries who find themselves unable to drum up financing by the markets and is providing cash on a daily basis to distressed banking systems.

At the news conference, Trichet is therefore expected to have some tough words for governments and will likely insist that governments make rapid progress on tough budget reforms and on EU financial discipline.

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