Eurozone, UK keep key rates the same

Bloomberg

The ECB kept its benchmark interest rate at a record low of 1 percent Thursday, after first signs of an economic recovery emerged. "The reality is that the ECB are done cutting rates and will not be announcing any further policy initiatives," said James Nixon, an economist at Societe Generale in London. Still, "I’m very concerned that much more has to be done to stimulate the economy from here."

The 22-member Governing Council has been split over whether to follow the Federal Reserve and Bank of England, which have cut their key rates close to zero and are buying government and corporate bonds to tackle the worst recession in six decades. The debate over how far the ECB should go reached the highest level of European government this week, with German Chancellor Angela Merkel backing the Bundesbank’s view that asset purchases are a step too far.

Bundesbank President Axel Weber argues there is no real risk of deflation and buying assets to flood the economy with money is an unnecessary risk that could sow the seeds of future crises. Officials from smaller nations such as Slovenia’s Marko Kranjec and Cyprus’s Athanasios Orphanides are less certain and have indicated the ECB could buy a broader range of assets to fight the recession.

BoE continues bond purchases

The Bank of England, meanwhile, kept its key rate at 0.5 percent and reiterated its plan to buy 125 billion pounds ($206 billion) of government and corporate bonds.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, reiterated its plan to buy 125 billion pounds ($205 billion) of government and corporate bonds.

The Bank of England has now entered its fourth month of money-printing as officials assess mounting evidence that the slump is easing while the squeeze on credit persists. Reports this week have shown service industries grew for the first time in a year last month, manufacturing improved, consumer confidence increased, and house prices unexpectedly jumped.

"The economy has stabilized more quickly than people imagined, though there are questions about the strength of the recovery," said Nick Kounis, an economist at Fortis Bank in Amsterdam and a former U.K. Treasury official. "The bank is going to wait and see if it needs to do more."

In another development, Iceland’s central bank lowered the benchmark interest rate by a percentage point, defying calls against the move from the IMF, as the economy slumps into its worst recession in 60 years.

Policy makers lowered the repo rate to 12 percent from 13 percent, Reykjavik-based Sedlabanki said on its Web site Thursday. The rate cut is the fourth since the island received a $5.1 billion IMF-led bailout in November.

IMF Mission head to Iceland, Mark Flanagan, last week advised against an interest rate cut.