By Frances Robinson
The Frankfurt-based ECB kept its benchmark interest rate at 1 percent, as predicted by all 62 economists in a Bloomberg News survey. A separate poll shows the rate may stay there until the first quarter of next year. President Jean-Claude Trichet has already announced changes to ECB collateral rules to help Greece as it struggles to finance its debts.
The ECB’s 22-member Governing Council is gradually withdrawing the measures it took to tackle Europe’s worst recession since World War II, including providing banks with unlimited cash. At the same time, concern that Greece’s crisis could spread to other nations in the 16-nation euro region is undermining confidence in the euro. The single currency fell for a fifth day against the dollar today, European stocks dropped and Greek bonds slumped.
“Greece is keeping the ECB in wait-and-see mode,” said Carsten Brzeski, an economist at ING Group in Brussels. “The indirect impact from the Greek case is that we will see more fiscal tightening from several euro-zone members earlier than the ECB thought, which has a deflationary impact and is slowing down the recovery.”
Weaker Euro
The euro weakened to $1.3302 at 1:48 p.m. in Frankfurt following the announcement from $1.3344 yesterday. Trichet will brief reporters on today’s decision at 2:30 p.m. He has promised to reveal details of the new collateral framework.
The Bank of England kept its benchmark interest rate unchanged at a record low of 0.5 percent earlier today and held its bond-purchase plan at 200 billion pounds. In the U.S., the Federal Reserve has maintained its pledge to keep rates at a record low for an “extended period.” By contrast, the Reserve Bank of Australia this week raised its key rate for a fifth time in six meetings to 4.25 percent.
As the Greek crisis persists, economists have pushed back expectations for ECB rate increases and now don’t expect a move until the first quarter of 2011, a Bloomberg survey shows. A month ago, the median forecast was for the ECB to raise borrowing costs in the fourth quarter of this year.
Economic Growth
The ECB predicts the euro-region economy will expand 0.8 percent this year after contracting 4.1 percent in 2009. There are signs growth is accelerating after it ground to halt in the fourth quarter. While unemployment is at an 11-year high, economic confidence improved in March and the region’s services and manufacturing growth accelerated to the fastest pace since August 2007.
Euro-region leaders last month endorsed a Franco-German proposal to help Greece with a mix of International Monetary Fund and bilateral loans at market interest rates, while expressing confidence that the debt-laden nation wouldn’t need outside help to fix its problems.
Trichet initially opposed IMF involvement in any rescue. Mounting speculation that the plan will unravel jolted financial markets today.
The Greek 10-year spread to benchmark German bunds widened to 442 basis points, the highest since the euro’s inception in 1999, and the cost of insuring against a default by the nation climbed to a record. The euro fell as low as $1.3282. It has dropped 12 percent against the dollar since Nov. 25.
While Trichet’s decision to extend the ECB’s emergency collateral rules into next year will ensure Greek bonds aren’t excluded from the central bank’s refinancing operations, the move may come at a cost. The new framework will make it more expensive for banks to exchange Greek bonds for central bank funds because of their lower credit rating.
“Though keeping Greece in the picture beyond 2010,” the rule changes “will almost certainly make it more expensive for Greek banks to finance themselves next year,” Societe Generale economists said in a note to clients today.
To contact the reporter on this story: Frances Robinson in Frankfurt at frobinson6@bloomberg.net
Last Updated: April 8, 2010 07:54 EDT
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