ECB reduces key interest rate to 1 pct

Bloomberg

refid:11603165 ilişkili resim dosyası

ECB officials meeting in Frankfurt lowered the benchmark rate by a quarter point, as predicted by all 53 economists in a Bloomberg News survey. Separately, the Bank of England left its key rate at 0.5 percent and increased its asset-purchase program.

"That’s it with rates," said Stephane Deo, chief European economist at UBS in London. "They are now moving into unconventional territory. [Governor Jean-Claude] Trichet will announce an extension of the bank loan maturities and will have to flag that the ECB will keep all other options open."

The difficulty for Trichet is that his 22-member Governing Council is split over how best to proceed. Germany’s Axel Weber wants the ECB to signal that 1 percent is the floor for the key rate and has argued against buying government or corporate debt to boost the economy. Others such as Athanasios Orphanides of Greek Cyprus say asset purchases and deeper rate cuts may be needed.

"The continuing divisions and bickering risk delaying the appropriate policy response," said James Nixon, an economist at Societe Generale in London.

Having cut their key rates to close to zero, the Bank of England, U.S. Federal Reserve and Bank of Japan are now buying bonds, effectively printing money to reflate their economies in a policy known as quantitative easing. With recent economic reports in Europe suggesting the worst of the recession is over, Trichet may find common ground around the less aggressive approach put forward by Weber.

Factory orders start to rise
The pace of decline in Europe’s service and manufacturing industries is easing and factory orders in Germany, the region’s largest economy, unexpectedly rose in March.

"The recent stronger data have increased the risk that the bank will settle for a more prudent approach," said Marco Annunziata, chief economist at UniCredit Group in London. "This would be a mistake. The war against the crisis is not won yet."

Arguing that asset purchases are not required, Weber is pushing for the ECB to extend the maturities on its loans to banks to ease tension.