GeriGündem ECB keeps interest rate at 1 percent
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ECB keeps interest rate at 1 percent

FRANKFURT - The European Central Bank, or ECB, kept interest rates steady as it rolls out new tools to battle the worst recession since World War II.

ECB officials meeting in Luxembourg Thursday held the benchmark rate at a record low of 1 percent, as predicted by all but two of 60 economists in a Bloomberg News survey. The central bank, led by President Jean-Claude Trichet, may keep the rate there until the fourth quarter of 2010, a separate survey showed. The ECB last week lent banks a record 442 billion euros for 12 months at its key rate in the hope they will pass on cheaper credit to companies and households. It will also start buying 60 billion euros of covered bonds this month to encourage lending. "Rates are on hold and now they will focus on the implementation of their non-standard measures," said Julian Callow, chief European economist at Barclays Capital.

"There are concerns about pockets of the banking sector and if things turn down again, they might have to contemplate buying commercial paper and corporate bonds."

The world financial and economic crisis is "far from over" two years after it began, HSBC Holdings Chairman Stephen Green said on June 30. "We cannot even say we are past the worst."

The central bank for the 16-member euro region has been reticent to follow the examples of the U.S. Federal Reserve, Bank of England and Bank of Japan, which have lowered their main rates to close to zero and are buying government and corporate bonds to reflate their economies. The ECB, whose key rate is still the highest among the Group of Seven nations, has focused on getting credit flowing through the banking system again, arguing that two thirds of its economy is financed by banks.

Even so, loans to households and companies in the euro area grew at the slowest pace on record in May as the recession crimped demand for debt and prompted banks to tighten credit standards.

While the ECB’s measures have stabilized the banking industry, "they have not, at this stage, succeeded in pushing credit into the real economy," said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group in London. That could be done by buying corporate bonds, he said.

The ECB initially considered a package of asset purchases worth 125 billion euros that included corporate bonds and commercial paper, according to people briefed on the talks.
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