Europe Economy

Europe Central Bank Holds Key Rate Steady

The European Central Bank kept its key monetary policy rate flat at 4% on Thursday due to persistent turbulence in the financial markets because of fears of a spillover of the U.S. subprime crisis.

It also left its marginal lending rate, at which it lends to commercial banks, flat at 5%.

ECB President Jean-Claude Trichet said the decision was unanimously taken by the bank's governing council members and that "upside risks" still remained on the inflation front, while euro-zone economic growth projections for this year were revised slightly down.

However he did not mention "strong vigilance" on inflation, a coded expression which markets have so far interpreted to mean they should expect a rate hike at the ECB's next meeting.

Asked about the absence of the phrase, Trichet said: "I don't want to comment any more on that, it's up to the market to make a full judgement on that."

The euro, which was up slightly against the dollar following the ECB's announcement, dipped again after Trichet said the recent volatility in financial markets had increased uncertainties.

"Given the high level of uncertainty, additional information is needed to draw conclusions on monetary policy," Trichet said.

Before the meeting started, the ECB added 42.24 billion euros ($57.4 billion) to money markets to ease tensions on the euro interbank lending market.

Supplementary Cash

The ECB added a supplementary, variable-rate three-month tender in addition to the monthly longer-term refinancing operations, to help ease the recent liquidity crunch. EURIBOR three-month rates rose to levels not seen since 2001 over the past days, as banks have been reluctant to lend to each other.

Analysts still expect the ECB to go ahead with the rate hikes once the financial crisis is over, to fend off inflationary pressures.

"It's just a pause," Karsten Junius from Dekabank told "Power Lunch." He said his bank was expecting two rate rises from the ECB by the end of the year but now lowered their forecasts to only one 0.25% rise.

He said the ECB's move should contribute to calming market jitters.

"I think we have a confidence crisis, and I think confidence will slowly come back to the markets if they see that everybody is getting liquidity," Junius added.

Bank of England also Keeps Rate Flat

Earlier on Thursday, the Bank of England kept its benchmark rate unchanged at 5.75% for the second month in a row.

The cost of money has already risen because of banks' reluctance to lend to each other, caused mainly by fears that part of the collateral offered to back the loans would be somehow linked to risky assets such as the U.S. subprime mortgages.

The central bank released unexpected statements about the state of the credit markets.

"It's too soon to tell how the market disruption will impair the availability of credit," the BoE said in a statement, adding that "pay pressures remain muted at the moment."

Many investors will take the decision and statements as confirmation that recent credit turmoil has altered official monetary policy.

"It emphasizes that rates have peaked … I think we've seen the last of the rate hikes," Matthew Sharratt, U.K. Economist at Bank of America, told "Power Lunch."

"It shows the BoE is on its back foot and that's not great really," added Clem Chambers, CEO of ADVFN.

On Wednesday, when the three-month LIBOR rate reached 6.8%, the highest in eight and a half years, the Bank of England intervened to help banks get over the liquidity crisis.

It allowed commercial banks to borrow more from the central bank at the benchmark rate rather than the penalty rate, which is 6.75%, while still looking for any signs the market turmoil has trickled into the real economy.