July 22, 2024

European Central Bank Holds Rate Steady but Hints at a July Increase

The euro fell against the dollar, however, after Jean-Claude Trichet, the central bank president, continued a disagreement with the German government by rejecting any suggestion that creditors of Greece should be required to share the burden of a rescue plan.

“We are not in favor of restructuring, haircuts and so forth,” Mr. Trichet said at a news conference after the bank’s governing council met about monetary policy.

His statements were an implicit rebuke to Wolfgang Schäuble, the German finance minister, who said on Wednesday that holders of Greek bonds should swap them for debt that the country would have longer to repay.

The Bank of England, meanwhile, kept its main interest rate at a record low amid concerns that the country’s economy was still too weak to cope with higher borrowing costs.

In the 17-nation euro zone, which does not include Britain, the European Central Bank has been more focused on inflation, which has been pushed up by rising food and energy prices.

“Strong vigilance is warranted,” Mr. Trichet said. That language seemed to indicate that a rate increase in July is probable, though the bank always leaves its options open.

Central bank economists slightly lowered their forecast for inflation next year, suggesting that the bank might feel less pressure to raise rates quickly.

On Thursday, the European Central Bank left its benchmark rate at 1.25 percent, after raising it in April from 1 percent, the first increase in two years. Inflation in the euro area was 2.7 percent in May.

“When I compare inflation today to interest rates, I see a negative number,” Mr. Trichet said.

The benchmark rate in Britain was left at 0.5 percent, and Britain’s bank also kept the size of its asset purchase plan unchanged at £200 billion, or about $327 billion.

The European Central Bank said it would continue its emergency support of euro zone banks by granting them unlimited low-interest loans at least through September.

With Germany, Europe’s largest economy, growing so quickly that some economists fear overheating, the central bank has been trying to nudge interest rates back to levels that would be normal in an upturn.

But the Greek debt crisis still threatens growth in the euro zone as a whole.

Economies in Spain, Ireland and other so-called peripheral countries remain sluggish. Higher rates could make it harder for those countries to recover.

Mr. Trichet argued that the best way to help the European economy was to make sure that prices were contained.

“It is good for all countries,” he said.

Questions about Greece dominated the news conference, and Mr. Trichet showed no sign of being willing to consider a Greek restructuring unless it was done voluntarily by creditors — an outcome that is difficult to imagine.

He implied that any restructuring of Greek debt might prompt the bank to stop accepting the country’s bonds as collateral.

A move like that could be fatal for some Greek banks that depend on low-cost loans from the central bank.

“It is difficult to see how this debate will be resolved,” said Marie Diron, senior economic advisor at Ernst Young, the consulting firm.

“Someone, either the E.C.B. or the German government, needs to make some concessions to reach a compromise,” she wrote in a note.

“And this needs to happen soon as time is running out for Greece to refinance its debt.”

Greece reported that its economy shrank far more than expected at the start of 2011.

That could signal that a second wave of austerity measures demanded by the European Union and the International Monetary Fund would impose even more pain on a fractious society.

Gross domestic product fell at an annual rate of 5.5 percent in the first three months of this year, the official numbers showed, far more than an earlier estimate of 4.8 percent.

Though it does not belong to the euro zone, Britain also remains fragile economically.

Consumer confidence worsened in April as more people claimed unemployment benefits and as wage increases lagged behind inflation.

Spending cuts and tax increases that are part of the government’s austerity program made households even more reluctant to spend.

The British economy stagnated in the six months through the end of March. The Bank of England governor, Mervyn A. King, has warned that inflation could accelerate to about 5 percent in the short term before cooling off again.

Higher consumer prices, partly a result of higher commodity prices, have also contributed to slowing household spending.

“The story of weak growth is still going to continue for a while,” said James Knightley, a senior economist in London for ING Financial Markets.

Some economists had predicted that British rates would rise in May this year, but as the economic outlook deteriorated they have pushed that back. Mr. Knightley said he expects an increase as early as this November.

The Bank of England did not issue a statement Thursday. But Paul Fisher, an official at the bank, argued last week that raising interest rates should be delayed until the economy was stronger.

The International Monetary Fund on Monday backed Prime Minister David Cameron’s plan to cut Britain’s budget deficit, which had been criticized by the opposition Labour Party as too strict and harming the economic recovery.

Though it was a formality, the central bank officially endorsed Mario Draghi, governor of the Bank of Italy, as successor to Mr. Trichet, whose eight-year term expires at the end of October.

European leaders are expected to officially nominate Mr. Draghi this month. In a statement, the central bank called Mr. Draghi, “a person of recognized standing and professional experience in monetary or banking matters.”

Jack Ewing reported from Frankfurt and Julia Werdigier from London.

Article source: http://www.nytimes.com/2011/06/10/business/global/10rates.html?partner=rss&emc=rss

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