ECB And Bank of England Keep Rates On Hold

By: Dr. Mike Campbell

There have been positive signs in the European financial sector that it is recovering. The continent’s banking industry was selectively put through “stress tests” that were designed to see how they would cope with another financial disaster and the results were encouraging. HSBC, Barclays bank, BNP and Commerzbank were amongst industry leaders to announce a good return on profit in the last two weeks. However, it is obviously too early to expect to see bank lending rates move back towards their traditional levels. Both the ECB and the Bank of England have decided to continue with their policies of historically low interest rates.

In the case of the ECB, the interest rate has been held at 1% for the last 15 months. ECB President, Jean-Claude Trichet, commented that the prospects for growth within the Eurozone were moderate, but that the rate of growth remained uneven and uncertainty remained. Another factor cited by analysts for the continuation of the policy is that many EU states are cutting back public spending in a bid to reduce sovereign debt which is likely to weaken economic growth.

In the UK, the interest rate has been pegged at 0.5% for the18^th month. UK inflation is running at 3.2%, well above its target value of 2%, but the Bank seems to believe this is a secondary problem at the moment. The UK is faced with reducing its own public sector debt and has also announced public sector cuts which may risk weakening economic growth. The decision to maintain the policy and to hold further qualitative easing measures in reserve, has been welcomed by economists.