By Simone Meier and Gabi Thesing
September 6, 2007
SourceSept. 6 (Bloomberg) -- The European Central Bank pumped 42.2 billion euros ($57.7 billion) into money markets to lower borrowing costs and said there's more to come as it shelved an increase in the benchmark interest rate.
Policy makers meeting in Frankfurt kept the refinancing rate at 4 percent, stepping back from an increase signaled on Aug. 2 by ECB President Jean-Claude Trichet, after the U.S. housing slump threatened to curb economic growth.
``Financial-market volatility and reappraisal of risks over recent weeks have led to an increase in uncertainty,'' Trichet said today after the rate decision. ``Given this high level of uncertainty, it's appropriate to gather additional information before drawing conclusions'' on interest rates.
The overnight deposit rate for euros fell the most in almost two weeks, to 4.05 percent, after the ECB loaned emergency cash to banks and Trichet said more funds will be provided. His comments, and the Bank of England's decision today to keep its main interest rate unchanged, came after an increase in the cost of credit that followed the collapse of U.S. subprime mortgages.
``The ECB finds itself in a dilemma,'' said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. ``Economic fundamentals require at least one more rate increase and inflation concerns haven't eased. On the other hand, it needs to deal with market turbulence.''
`Upside Risks'
The ECB today stuck to its forecast that inflation will average about 2 percent this year and next. The bank aims to keep the annual rate of consumer price increases below 2 percent. It lowered the prediction for economic growth in 2007 to about 2.5 percent from 2.6 percent. The region's economy expanded 2.7 percent last year, the fastest pace since the turn of the decade.
Trichet said there are ``upside risks'' to inflation and the current level of interest rates isn't hampering economic growth, indicating the bank remains ready to raise the benchmark rate. The euro rose against the yen, erasing an early loss.
``The ECB kept its tightening bias with no commitment whatsoever that they will do something as early as next month,'' said Jacques Cailloux, an economist at Royal Bank of Scotland Plc in London. ``They need more data to decide, which is probably the position other central banks are adopting as well.''
The Bank of England today left its benchmark lending rate at 5.75 percent and the Indonesian central bank kept its key rate at 8.25 percent. The Australian and Canadian central banks also opted yesterday to keep borrowing costs unchanged. The Bank of Japan last month stepped back from plans to raise interest rates.
U.S. Federal Reserve chairman Ben S. Bernanke said Aug. 31 the bank will do what's needed to prevent the credit rout from undoing America's six-year economic expansion.
Curbing Growth?
Concern that defaults on U.S. home loans to people with poor credit histories would curb growth in the world's largest economy prompted a slide in stock and commodity markets and pushed up corporate borrowing costs in early August.
Central banks added more than $400 billion to money markets since Aug. 9 to ease lending between banks.
While those actions succeeded in reducing money-market rates for a time, by yesterday the overnight deposit rate for euros had climbed to 4.68 percent, the highest in six years.
China ordered banks to put aside more money as reserves for the seventh time this year to cool lending and investment after inflation accelerated to a 10-year high. The country's economy expanded 11.9 percent in the second quarter from a year earlier, the fastest pace in more than 12 years.
To contact the reporter on this story: Gabi Thesing in Frankfurt at
gthesing@bloomberg.netLast Updated: September 6, 2007 10:18 EDT