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European Central Bank

The European Central Bank was established by the Treaty of Amsterdam in 1998 and is headquartered in Frankfurt, Germany. The objective of the bank is to maintain price stability within the euro zone. The president of the ECB is Mario Draghi, former governor of the Bank of Italy.

BusinessBanking & Finance

Interest rates kept on hold in Europe

ECB and BOE opt to keep rates at 0.5pc, with the latter sticking to bond-buying pause

PUBLISHED : Thursday, 01 August, 2013, 12:44pm
UPDATED : Friday, 02 August, 2013, 3:17am

The European Central Bank (ECB) left interest rates at a record low 0.5 per cent yesterday and affirmed they will remain there for some while to come and could yet fall further.

Meanwhile, the Bank of England also maintained interest rates at 0.5 per cent and opted not to revive its bond-buying programme, as expected.

At its second meeting under new governor Mark Carney, Britain's central bank kept its powder dry at its policy meeting, leaving investors to wait for the expected announcement next week of a new strategy to get the country's economy back to strength.

ECB president Mario Draghi hinted that policy would not be tightened until well into next year at the earliest, although the central bank will give no time horizon for when rates might move.

"Our monetary policy stance … provides support to a gradual recovery in economic activity in the remaining part of the year and in 2014," Draghi told a news conference.

"The Governing Council confirms that it expects the key ECB rates to remain at present or lower levels for an extended period of time," he said, reiterating last month's first stab at giving forward guidance on rates. That was unanimously supported by the 23-strong council, he said. But Draghi was guarded when pressed on whether the policymakers discussed a rate cut.

"We actually discussed only forward guidance, and within that ... confirmation of forward guidance you have an implicit decision about today's interest rates," he said. "And the decision about forward guidance was in fact unanimous."

The apparent absence of a discussion about cutting rates contrasted with last month, when Draghi said the council had an "extensive discussion" about a cut before deciding to hold.

Berenberg bank economist Holger Schmieding said this change and the ECB's view that an upturn in economic indicators pointed to a pick-up later this year, "can be seen as modestly hawkish, in the sense that they may dampen residual rate cut hopes".

A closely watched business survey showed earlier yesterday that euro-zone manufacturing grew for the first time in two years last month. Unemployment in the bloc fell for the first time in more than two years in June.

Despite the promising economic reports, the ECB policy options are complicated by market responses to the US Federal Reserve's plans to slow its stimulus programme.

The ECB reacted last month to market turmoil sparked by the Fed's exit plan by breaking with precedent and offering forward guidance on rates.

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