ECB, BoE hold interest rates amid recovery hopes
NEW YORK/LONDON — The European Central Bank kept interest rates on hold yesterday, resisting pressure for more cuts to spur an economy that is showing signs of emerging from recession. The ECB also said it would begin direct purchases of covered bonds next month. Its counterpart, the Bank of England, also left its rates unchanged.

The US Federal Reserve, which like the central banks in Japan and Britain has cut rates below the ECB’s 1 per cent, is already looking ahead to the need to tighten policy to control the impact of its recent massive stimulus. With central bank interest rates around the world at record lows, policymakers face a tough call on when to start mopping up the flood of liquidity unleashed in the past year. Although much of the economic news remains grim, there are daily signs of improvement.

US jobless claims fell for a third straight week last week and eurozone retail sales inched up month-on-month for the first time in five months in April, signalling consumer demand is faring better than expected despite the worst recession in decades. US stocks opened higher on the fall in jobless claims and a rise in US worker productivity. British house prices also rose at their fastest monthly rate in 6½ years in May.

Long-term bond yields have started to rise globally as markets absorb massive government bond supply issued to raise funds for economic stimulus plans. Fears that this could stunt any recovery are now grabbing investor attention. “The market will remain shaky. After a decent performance for three months in a row, people are getting tempted to take some profits despite the fact that we are seeing more and more green shoots,” said Franz Wenzel, strategist at AXA Investment Managers, in Paris.

Federal Reserve Bank of Kansas City President Thomas Hoenig said the rise in long-term US bond yields was a warning to the Fed to begin tightening monetary policy to nip inflation risks. “Starting from where we are today, it is clear that interest rates must rise,” Hoenig told a business audience on Wednesday.

US shoppers searched for bargains and basics last month, leading several retailers to miss already-low sales expectations, as issues like unemployment and a troubled housing market led shoppers to adopt a thrifty attitude. Costco Wholesale, Target Corp and BJ’s Wholesale all reported steeper-than-expected declines.

Both the European Central Bank and Bank of England opted to keep rates at record lows of 1 per cent and 0.5 per cent, respectively.
The BoE said it would continue £125 billion ($208 billion) asset-buying programme to tackle the recession, while more details were awaited on the ECB’s 60 billion euro ($86 billion) plan to buy covered bonds.

The ECB has been split over whether to reduce interest rates further to spur economic recovery. ECB President Jean-Claude Trichet said yesterday they were at an appropriate level taking into account enhanced credit support measures. Trichet said risks to the economic outlook were balanced, and predicted economic activity would decline “at much less negative rates” over the remainder of 2009. He also said the ECB would begin purchases of covered bonds from next month until June 2010. — Reuters