Europe holds interest rates at 1%

By Reuters
Posted Oct. 7, 2010 at 6:56 a.m.

The European Central Bank will face scrutiny on Thursday over its response to a growing global battle over currencies and a spike in market interest rates after it held interest rates at a record low 1.0 percent.

The rate decision came as no surprise as all 79 economists in a Reuters poll had predicted the ECB would leave rates on hold for the 17th month in a row. The median forecast is for no change until the fourth quarter of next year.

Markets were little changed by the decision. “That was widely expected,” said RBS economist Silvio Peruzzo. “They could not really have done anything different,” he said, pointing to the rising euro and risks to the economy.

Reporters will grill ECB President Jean-Claude Trichet about foreign exchange rates at a news conference before meetings of G7 financial leaders Friday and a broader International Monetary Fund gathering in Washington.

The ECB and European governments have shown little sign of talk or action to cap recent gains for the euro, in contrast to policies in Japan, China and the United States which have led to warnings of a “currency war” in competitive devaluations.

The euro is at an eight-month high against the dollar, and is up almost 18 percent against the dollar since hitting a four-year low in June. It has gained 9 percent since the September rate meeting.

Trichet brushed off questions about the euro last week, and analysts said he would not get into the mix on Thursday.

“At some point the ECB will have to change tone, but it is not going to change today, and the rise in the euro will continue,” RBS’s Peruzzo said.

Data from core countries will encourage the ECB to hold course in its economic assessment. Strong German industrial orders and output data this week eased concerns about the sustainability of the recovery despite weakness in southern Europe.

The ECB could, however, tweak the monetary analysis to a slightly more upbeat direction after August money supply data came in surprisingly strong and private sector lending hit a 14-month high.

Read more about the topics in this post: , ,

Comments are closed.