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ECB rate stays at historic low of 1%

THE European Central Bank kept its main interest rate unchanged at a historic low of 1 percent yesterday amid a deeper-than-anticipated recession.

The ECB's decision to keep the refinancing rate on hold for the 16 nations that share the euro was in line with expectations after the bank indicated last month that it did not intend to make further cuts in the near term.

ECB President Jean-Claude Trichet stressed that the current economic picture remains difficult and that growth would not resume until mid-2010.

"Recent survey information indicates that, following two quarters of very negative growth, economic activity over the remainder of this year is expected to decline at much less negative rates," he said at a post-meeting press conference.

"After a stabilization phase, positive quarterly growth rates are expected by mid-2010," he added.

Economists were looking to further comments from Trichet on how to give the sagging economy an additional push by putting more money into the banking system through purchases of covered bonds. Last month, the ECB said it would begin to buy around 60 billion euros (US$85 billion) worth of euro-denominated covered bonds.

Covered bonds, mainly sold by banks to raise capital, differ from other bonds in that they are backed with collateral assets like mortgage or public sector loans and are kept on companies' balance sheets.

Covered bond holders often have first claim on the collateral assets or any payments should the issuer default, making them more secure than other bonds.

The hope is that the policy may raise prices of assets on bank balance sheets, help keep prices from falling for too long or too far, as well as give the banking system more funds to lend to homeowners and businesses.

The ECB has cut its benchmark interest rate by 3.25 percentage points since October. The most recent quarter-point cut came in May.

The ECB has been criticized by some analysts for not being as aggressive as either the United States Federal Reserve or the Bank of England in cutting interest rates and in promoting unconventional measures such as bond purchases to boost the money supply.

However, it has been very quick during the financial crisis to increase the availability of credit and broaden the kinds of collateral it will take from banks that want to borrow.

The BoE also kept its key rate unchanged at 0.5 percent and kept its policy of increasing the money supply to the economy.

Recent data showed the euro zone shrank by 2.5 percent in the first quarter compared to the previous three-month period.


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