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News : EU Economy Last Updated: Oct 6, 2011 - 3:51 PM


ECB keeps benchmark rate at 1.5%; Bank of England keeps rate at 0.5% -- a 1694-year low -- and will buy £75bn of government bonds
By Finfacts Team
Oct 6, 2011 - 1:34 PM

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An image of the planned new headquarters of the European Central Bank in Frankfurt. ECB President Jean-Claude Trichet layed the foundation stone on May 19, 2010. The €850m headquarters will consist of two towers—one 41 floors high and the other 44 floors—joined by a massive conference and visitor centre where a historic fruit-and-vegetable market once stood. It will be completed in 2014. Trichet's eight-year term expires at the end of October.

The European Central Bank (ECB) today left its benchmark interest rate unchanged at 1.5% for a third straight month, despite the worsening sovereign-debt crisis. Meanwhile, the Bank of England kept its key interest rate at 0.5%  --  a 1694-year low -- and it also agreed to buy £75bn worth of government bonds.

The ECB decision, which was widely expected, comes after Eurozone annual inflation jumped to 3% in September, from 2.5% the previous month.

Focus now is on the ECB's monthly press conference from Berlin at 1:30 pm Irish time, where Jean-Claude Trichet, ECB president will respond to questions on the debt crisis and the economic situation. Trichet, in his last press conference as president, is expected to signal that the ECB is ready to cut interest rates for the first time since May 2009.

In London, the Bank of England said it will buy £75bn of government bonds in a new series of quantitative easing to boost the UK's faltering economy.

The Bank said its Monetary Policy Committee agreed to finance a second round of asset purchases with newly created central bank money to ensure that the inflation rate didn't fall below its 2.0% target over the medium term.

The MPC also voted to retail the UK's benchmark interest rate on hold at 0.5%.

The BoE said in a statement that the pace of global expansion has slackened, especially in the United Kingdom’s main export markets. Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery.

The Bank said that in the United Kingdom, the path of output has been affected by a number of temporary factors, but the available indicators suggest that the underlying rate of growth has also moderated. The squeeze on households’ real incomes and the fiscal consolidation are likely to continue to weigh on domestic spending, while the strains in bank funding markets may also inhibit the availability of credit to consumers and businesses. While the stimulatory monetary stance and the present level of sterling should help to support demand, the weaker outlook for, and the increased downside risks to, output growth mean that the margin of slack in the economy is likely to be greater and more persistent than previously expected.

ECB webcast from Berlin

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