Friday, May 8, 2009

ECB package

The European central bank announced a multi-pronged attack on the recession on Thursday (7 May), cutting interest rates by a quarter point and unveiling plans to buy €60 billion worth of bonds held by euro area banks.
But the bank's president, Jean-Claude Trichet, was adamant that the innovative move to buy covered bonds did not constitute quantitative easing, saying the exact details on how the bank will raise the money will be announced next month. Covered bonds have traditionally been considered some of the safest corporate bonds on the market as they are backed by mortgages or public sector loans.
Independently on Thursday, the Bank of England announced it would pump a further €56 billion into the British economy through the purchase of government and corporate bonds. British interest rates remained unchanged however.
The ECB's quarter point interest rates cut bringing the bank's main lending rate to an historic low of just 1 percent. After the news was announced, many commercial banks around the euro area said they would pass the cut onto holders of tracker mortgages, helping reducing monthly mortgage repayments. Others however said they would not be passing the cut on, claiming instead that they wished to protect individuals opting to save.
Showing new signs of flexibility, Mr Trichet did not rule out the possibility of a further interest rate cut, marking a departure from previous statements in which he indicated 1 percent was the lowest the bank would go. While euro area rates have reached a new record low, they are still higher than those in the US which currently hover in a band between 0 - 0.25 percent. Both Britain and Japan also have lower rates on 0.5 percent and 0.1 percent respectively.
In a further measure, the ECB announced it would extend its lending period to banks from 6 to 12 months and would starting lending to the European Investment Bank for the first time. The European Investment Bank was set up by the 1958 Treaty of Rome, with the aim of lending money of support EU policy objectives especially the financing of projects in poorer regions. The news should bring some cheer to Eastern Europe that has been particularly badly hit by the crisis.
The comprehensive package of measures announced on Thursday is more than many analysts had anticipated and reflect the ECB's gloomy assessment of the current economic situation. Mr Trichet said the first quarter of 2009 had been "very bad" and that the bank would revise down it growth forecasts next month.
Eurobserver

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