ECB Keeps Key Rate at 1% as It Weighs Greek Crisis

March 4 (Bloomberg) -- The European Central Bank left its benchmark interest rate at a record low as policy makers weigh the risks of withdrawing emergency lending measures amid Greece’s fiscal crisis.

The Frankfurt-based ECB kept its key rate at 1 percent, as predicted by all 52 economists in a Bloomberg News survey. President Jean-Claude Trichet has promised to give details on the next step in the ECB’s exit strategy when he holds a press conference at 2:30 p.m. today.

Greece’s soaring budget gap has roiled financial markets and sent bond yields surging in Spain and Portugal, whose deficits have also swelled in the wake of Europe’s worst recession since World War II. The crisis is undermining confidence in the euro area’s economic recovery and complicating the ECB’s plans to scale back the liquidity measures it introduced to nurse the region through the slump. Trichet must avoid any hint that the ECB will prematurely end its unlimited cash support for euro-area banks, said Colinllis, an economist at Daiwa Capital Markets in London. “It could spook markets, push up interest rates and make it more difficult for countries like Greece to finance its debt.” Greece, which must replenish 20 billion euros of borrowing in April and May, today began selling 10-year bonds.


‘Addicted’
The euro stayed lower against the dollar after the announcement and was down 0.2 percent to $1.3674 as of 1:47 p.m. in Frankfurt. The Bank of England today left its benchmark rate at a record low of 0.5 percent and kept the target for its bond- purchase program at 200 billion pounds ($302 billion). The cornerstone of the ECB’s program has been to provide banks with unlimited funding at its key rate in the hope they will lend it on to households and companies. The ECB has already said it will stop giving banks 12 and six-month loans to ensure they don’t become “addicted” to the cheap cash. Officials will today decide whether to extend the policy of unlimited allotment in its remaining seven-day, one-month and
three-month refinancing operations beyond the current guarantee of April 13. Before the global financial crisis, banks were required to bid for funds in auctions. “Trichet will be very keen to show that the ECB will not have its exit strategy held hostage by the Greek situation,” said Laurent Bilke, a former ECB forecaster who now works for Nomura International Plc in London. “They always said they would announce the next steps of the exit this month, and they will.”


Demonstrations
The Greek government has announced a series of spending cuts to convince investors it can reduce its budget gap, plans that have prompted protests and strikes. Demonstrators today took over the Finance Ministry building in central Athens and blocked streets in the city. As well as Greece, ECB policy makers have to take into account the sluggish economic recovery. The central bank in December forecast growth of 0.8 percent this year after a 4.1 percent contraction in 2009. Trichet will present new forecasts today.

“The recovery feels more vulnerable than it did in December, when the ECB initiated the exit,” said Mark Wall, an economist at Deutsche Bank AG in Frankfurt.


Inflation Muted
Euro-area growth almost ground to a halt in the fourth quarter, the European Union confirmed today. Unemployment held at the highest level in more than 11 years in January and economic confidence unexpectedly weakened in February. The
European Commission last month said the economy may fail to gather strength for most of 2010. The cooling recovery is keeping a lid on prices, reducing the need for the ECB to tighten policy any time soon. Inflation eased to 0.9 percent last month from 1 percent in January. That compares with the ECB’s aim to keep inflation just below 2 percent. Goldman Sachs Group Inc. this week pushed its forecast for the first ECB rate increase into 2011 from the fourth quarter of this year, and said the bank will exit non-standard measures more slowly than previously anticipated. “The tensions surrounding Greece and the banks in general are likely to inject some concern that a too-fast exit could be dangerous,” Goldman’s chief European economist Erik Nielsen said in a note to investors. “We now believe that they’ll aim for a somewhat more gradual path than the one we have been forecasting for some time.”