ECB, BoE keep rates on hold at record lows

FRANKFURT — The European Central Bank (ECB) and Bank of England (BoE) kept interest rates at record lows yesterday as financial markets looked for guidance on growing euro zone debt problems. The ECB maintained its main lending rate at 1 per cent while the BoE rate stayed at 0.50 per cent.

Markets had widely anticipated the decisions and were far more concerned by debt-ridden Greece and other countries with soaring public deficits that have pushed the euro zone into its worst-ever crisis. "The issue has become much larger, basically it is all countries with large adjustment issues which are probably in focus," Deutsche Bank economist Gilles Moec said after the ECB rate decision was announced.

Ireland, Portugal and Spain are threatened by big deficits and slumping competitiveness exacerbated by the global economic crisis, while debt-laden Italy completes the group of euro zone members fuelling fears on financial markets. "This is the very first test of the single currency bloc," New York University economics professor Nouriel Roubini said, "eventually some countries might exit the monetary union."

ECB President Jean-Claude Trichet (pictured) terms such speculation "absurd" but the central bank is struggling to resolve a situation that some warned of when the euro zone was created 11 years ago. "The 'free loader' risk actually exists: if one country implements a massive fiscal deficit, the other countries are forced to come to its aid to avoid a default risk that would be very dangerous for the euro zone," Natixis economist Patrick Artus noted.

In theory, euro zone countries cannot expect to be bailed out by others but though ECB officials stress repeatedly that Greece must straighten out its finances on its own, most experts widely expect some sort of arrangement in the end. International Monetary Fund head Dominique Strauss-Kahn told RTL Radio yesterday: "The euro zone cannot afford not to help Greece in some form or another.''

Greece has a public deficit estimated at around 12.7 per cent of gross domestic product and debt equal to 113 per cent of GDP, far above the respective 3 per cent and 60 per cent limits established for euro zone members. Athens and other euro zone capitals have presented plans for trimming their bloated budgets, but economists and the ECB itself remain wary of empty promises.

Trichet was set to field questions on the issue at a press conference, and while he "will be broadly supportive of Greece’s latest fiscal plans, he will stress the need for more aggressive tightening throughout the region," Capital Economics economist Jennifer McKeown said.Moec said Trichet would have to strike "a delicate balance between restating that fiscal restraint is essential to the proper working of monetary union, without being perceived as rocking the boat for some of the countries."

"It's going to be quite acrobatic actually to maintain this kind of very balanced, very nuanced approach." Trichet might also comment on measures the ECB would take to unwind exceptional support it provided last year to underpin growth as the euro zone fell into its first recession, and on a bank survey that showed some businesses are still finding it hard to get the loans they need to recover. — AFP