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Thursday, the European Central Bank left its key interest rate unchanged at a record low for the sixth straight month in November to boost the 16-nation economy, which is emerging from the worst recession in decades.
The ECB Governing Council, led by President Jean-Claude Trichet, left its key interest rate, which is the interest rate on main refinancing operations at 1%. Interest rates on marginal lending facility and deposit facility were maintained at their current levels of 1.75% and 0.25%, respectively.
"Obviously, the ECB sits very comfortably in its current wait-and-see position", ING senior economist Carsten Brzeski said. The central bank is expected to continue its extraordinary measures for the time being, though calls for setting exit measures have strengthened.
Trichet's press conference along with ECB Vice President Lucas Papademos that follows the announcement of the decision is eyed for more information. The ECB President is likely to repeat his statements made last month. Trichet is likely to buy some more time, postponing crucial decisions to the December meeting, Brzeski said.
On October 15, Trichet said the non-standard measures need to be phased out as the situation normalizes, and substantial policy stimulus must be withdrawn. "When the appropriate time comes, there should not be any concern about the ECB's ability to exit," he said, adding that the ECB's decisions on interest rates and liquidity have been transmitted reasonably well to the rest of the economy. Last week ECB Governing Council member Axel Weber said, "Unconventional measures will likely be rolled back next year."
The ECB is expected to introduce an extra charge for its 12-month operation due on December 15, the third and final tender set for this year. Banks drew EUR 75 billion at the last offering in September, down from EUR 442 billion in the first tender in June.
The Eurozone economy probably exited the worst recession in the third quarter. According to an interim forecast by the European Commission, published on September 14, Eurozone would grow 0.2% in the third quarter and by 0.1% in the fourth quarter.
"The end of recession in the third quarter still needs to be confirmed by the data but looks to be only a formality," the ING economist said on November 2. Growth momentum should continue in the fourth quarter. However, the economist expects the strong euro and lacklustre lending to give the ECB some headaches.
Tuesday, autumn forecast from the European Commission showed that the 16-nation bloc is set to contract 4% this year, unchanged from its interim economic forecast. The commission sees a gradual recovery with GDP growing 0.7% in 2010 and around 1.5% in 2011. The commission raised its forecast for 2010 from the 0.1% GDP decline predicted in its Spring forecast. The Eurostat is due to publish flash estimate of third quarter GDP data on November 13.
But, the return to growth is unlikely to give scope for commencing interest rate hikes, given the fragility of the recovery. On October 26, ECB Governing Council member Christian Noyer said, "We have stabilized our economies and avoided the worst. There are many downside risks and adverse scenarios that could still materialize."
That said, inflation readings have been benign. Preliminary data showed Eurozone inflation stayed negative for a fifth month in October, while jobless rate in September rose to its highest level in more than a decade. However, economic sentiment strengthened more than expected in October pointing towards a possible recovery in the third quarter. Manufacturing sector posted its first expansion in seventeen months in October and services sector continued to expand for the second month.
Also on Thursday, the Bank of England retained its key interest rate as expected and raised the size of the quantitative easing measures by GBP 25 billion to pull the economy out of recession. The Monetary Policy Committee, led by Governor Mervyn King increased the size of the asset purchase scheme by GBP 25 billion to GBP 200 billion. The central bank maintained the official Bank Rate paid on commercial bank reserves at a record low of 0.5%.
Elsewhere, Iceland's central bank lowered it seven-day collateral lending rate to 11% from 12%. The central bank also reduced its deposit rate by 0.5 percentage points to 9% and the overnight lending rate to 13% from 14.5%. Meanwhile, the Czech National Bank retained two-week repo rate at 1.25%. From Asia, the Philippine central bank left its policy interest rates steady at 4%.
On Tuesday, the Reserve Bank of Australia, the first G20 central bank to raise interest rate after the global economic crisis, hiked key interest rate for the second month in November. The central bank lifted the rate by 25 basis points to 3.5%. In October, it had announced a 25 basis points increase in its interest rates.
Norway's central bank became the first European central bank to raise the key interest after the crisis. On October 28, it increased its deposit rate by a quarter point to 1.50%.
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