European, British central banks leave rates alone

By GEORGE FREY and ROBERT BARR

posted: 20 DAYS 15 HOURS AGO

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FRANKFURT -The head of the European Central Bank on Thursday hinted it could begin withdrawing some of its crisis measures soon, while the Bank of England pumped more money into the economy in an attempt to get Britain out of recession.

Neither bank touched interest rates, already at record lows of 1 percent for the eurozone and 0.5 percent in Britain.

ECB President Jean-Claude Trichet said that the 16 euro countries face an uncertain recovery. But he broadly hinted the bank was getting ready to take back some of its added lending measures that have provided banks with ready cash during the financial crisis and promised to say more at next month's meeting.

"We will do the phasing-out in a timely and gradual fashion, I'll give the rendezvous in a month's time," he said. He said he wouldn't discourage speculation the bank will end its 12-month credits to banks, one of its crisis measures aimed at keeping the financial system afloat.

He said the eurozone faces only a gradual and uncertain recovery. "At the same time, the latest information continues to signal an improvement in economic activity in the second half of this year," he said. The bank "expects the euro area economy in 2010 to recover at a gradual pace, recognizing that the outlook remains subject to high uncertainty."

He urged banks to do their part to get the economy back on its feet.

"We call upon the banks, a very strong message to banks, to repair their balance sheets, to do their jobs to lend to the private sector, the economy to private households."

With interest rates already about as low as they can go, markets are watching central bankers' efforts to stimulate the economy by other means such as expanding the money supply. The Bank of England did that Thursday by saying it would add 25 billion pounds ($41 billiom) to its existing 175 billion pound program of bond purchases.

It was less than the 50 billion pound increase some analysts had expected.

The move follows disappointing growth data last week that showed Britain unexpectedly shrank in the third quarter. The bond purchases increase the total amount of money in the economy and puts it in the hands of banks in hopes they will lend to businesses.

The European decisions come a day after the U.S. Federal Reserve also left rates at a record low of 0-0.25 percent and said it would keep them there for "an extended period" even as growth picks up after a deep recession. The world's central banks have slashed interest rates and pumped extra money into their economies and banking systems since the crisis began to bite in late 2007.

Attention is increasingly turning to how long those measures — which carry a long-term risk of inflation — must be maintained and when the central bankers think the economy will be strong enough to withdraw all or some.

The Bank of England's move came after last week's surprise news that Britain remained in recession during the third quarter, even as the United States turned to growth. Most economists expect the eurozone to show growth when third quarter figures come out next week.

Nonetheless, the Bank of England said a number of indicators of spending and confidence were up, suggested that "a pickup in economic activity may soon be evident."

Meanwhile, Iceland's central bank lowered its official interest rate by a full point to 11 percent as the country tries to get back on its feet after the credit crisis toppled its overweight banking system last year. It had been at 12 percent since June.

—

Associated Press Writer Barr reported from London.

On the Net:

http://www.ecb.int

http://www.bankofengland.co.u

2009-11-05 11:02:46