ECB Cuts Rates; BOE Moves to Ease Liquidity
Iceland Cuts Rates for Third Time in Three Months
>>>Punchbowl!?!?! Hell. This is a freakin orgy. Bread and Circus??? Kick that can down the road a few more miles.<<<
By ROMAN KESSLER and NATASHA BRERETON
The European Central Bank Thursday cuts its key interest rate by a quarter point to 1% in a widely expected move that may put an end to the easing cycle in the economy of 329 million people.
The Bank of England, which has acted more aggressively since the global economy entered a sharp contraction in late 2008, kept its key interest rate at 0.5% but increased its bond-buying plan by £50 billion ($75.71 billion) to £125 billion, as the U.K. central bank responded to the risk of serious economic decline.
The ECB didn't provide a reason for its decision, but President Jean-Claude Trichet will brief the media at a press conference scheduled for 1230 GMT.
Bringing the ECB's rate to the lowest level in its 10-year history, some officials on the rate-setting governing council have said the key policy rate ought not to fall below 1%. Mr. Trichet said in April he would consider the use of unconventional policy tools to bring down the cost of borrowing for households and companies.
The central bank may extend the maturity it offers for borrowing to euro-zone financial institutions beyond the current maximum of six months, a move that would bring stability to the shaken market for banks' liquidity provisions. It would, however, only indirectly help the real economy.
But markets are hoping for more. Executive Board Member Juergen Stark, the institution's chief economist, gave rise to hopes that the ECB could circumvent the clogged credit system by buying commercial paper, short-term IOUs companies use to pay for wages and supplies. The commercial paper market has virtually dried up and an intervention by the lender of last resort would inject liquidity into a market where it is most needed.
Other unconventional policy steps could include the purchase of government debt in the secondary market, a money-printing exercise known as quantitative easing
The timing of the BOE's move Thursday to increase its bond-buying plan, meanwhile, was a surprise. While many analysts had tipped the bank to increase its buying in the coming months, only two of 13 economists polled by Dow Jones Newswires last week had expected an immediate increase.
The pound fell sharply on the news, dropping almost one cent against the dollar to $1.5064, while the euro rose half a penny to the day's high of 88.45 pence.
The U.K. central bank's policy makers acknowledged there were "promising" signs that the contraction in the country's economy was beginning to abate. But the global banking and financial system are still "fragile" and the world economy remains in "deep recession," they noted.
Existing "stimulus should in due course lead to a recovery in economic growth, bringing inflation back towards the 2% target. But the timing and strength of that recovery is highly uncertain," they said.
The U.K. economy shrank 1.9% in the first quarter of this year, marking the third-straight quarter of output falls and the sharpest contraction since 1979, but a growing number of data suggest the decline may be starting to abate.
Since October, the BOE's Monetary Policy Committee has cut rates by a total of 4.5 percentage points. The MPC believes that below 0.5%, the damage rate cuts would do to the profitability of banks would outweigh any stimulus they would give to the economy.
The MPC therefore decided to embark on a policy of quantitative easing, buying mostly government bonds, and a smaller amount of corporate bonds and commercial paper, worth a total of £75 billion over the three months to early June, with freshly created central bank money.
Ahead of the BOE and ECB rate decisions, Iceland's central bank cut its key rates by a larger-than-expected 2.5 percentage points to 13%. It is the third cut in rates this year by the central bank.
Once-rampant inflation is now in decline on the island as a harsh recession sets in, and stringent control over capital flows has kept the country's debilitated currency, the krona, on life support.
The country has been struggling to resuscitate its economy after its banking system collapsed in October and the government sought a $10 billion International Monetary Fund-led bailout. |
