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ECB slashes rates as BOE keeps on hold
Published in The Saudi Gazette on 08 - 05 - 2009

The European Central Bank cut its main interest rate to a new record low on Thursday, and will buy up bonds for the first time in a bid to stem the euro zone's economic decline and shore up shaky markets.
The decision is the first step on a path of quantitative easing, although the ECB stopped short of the massive asset purchase programs being followed by counterparts including the US Federal Reserve and the Bank of England.
The ECB plans to spend about 60 billion euros ($80 billion) buying covered bank bonds - securities issued by banks and backed by mortgages or other loans - but did not rule out expanding the program into other types of assets down the track.
As well, the ECB will double the maximum term of its loans to banks to 12 months and prolong easier rules on the types of assets which can be used as security for loans in a three-pronged package of steps to complement its rate cuts.
ECB President Jean-Claude Trichet said the latest 25 basis point cut, which took the main refinancing rate to 1.0 percent, as expected by markets and economists, left benchmark credit costs at an “appropriate” level.
Still, he said this was not necessarily the lowest point of the cycle which has slashed rates by 3.25 percentage points in eight months.
In London, however, the Bank of England said Thursday it would pump out 50 billion pounds ($75 billion) of new money and kept interest rates at a record-low 0.5 percent as Britain battles a deep recession.
The move to increase the new money supply to 125 billion pounds to boost bank lending had not been expected by markets, while the decision to freeze the BoE's key interest rate was widely forecast.
“The Bank of England's Monetary Policy Committee (MPC) today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5 percent,” the bank said an official statement.
“The Committee also voted to continue with its programme of asset purchases financed by the issuance of central bank reserves and to increase its size by 50 billion pounds to a total of 125 billion pounds.”
British interest rates hit 0.5 percent - the lowest level in the BoE's 315-year history - back in March.
At the same time the central bank launched a program of quantitative easing (QE), whereby it agreed to create 75 billion pounds of new money – a move seen by many observers as a last chance to crack the credit crunch.


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