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November 6, 2009

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Interest rates at record lows

THE European Central Bank and the Bank of England kept interest rates at record lows yesterday as their economies struggle to emerge from recession.

The British central bank decided on an extra boost by adding 25 billion pounds (US$41 billion) to the supply of money, following disappointing growth data last week that showed Britain unexpectedly shrank in the third quarter.

The ECB President Jean-Claude Trichet was giving his reasons at a press conference at the bank's headquarters in Frankfurt amid speculation the countries that use the euro will leave recession when growth numbers come out next week.

Markets were looking for clues on when the ECB might trim back some of its lending efforts that have been giving commercial banks more ready cash during the financial crisis.

The European moves come a day after the United States Federal Reserve also left rates at a record low of 0-0.25 percent and said it would keep them there for "an extended period" even as growth picks up after a deep recession. The world's central banks have slashed interest rates and pumped extra money into their economies and banking systems since the crisis began to bite in late 2007.

Attention is turning to how long those measures - which carry a long-term risk of inflation - must be kept and when the central bankers think the economy will be strong enough to withdraw all or some.

In Britain's case, the BoE decided things are still looking bad enough to expand its bond purchase program, called quantitative easing, by 25 billion pounds to 200 billion pounds from 175 billion pounds. It was less than the 50 billion pounds some analysts expected.

The purchases over the next three months are financed by the issuance of central bank reserves, creating new money and putting in the hands of the banks. The idea is to encourage bank lending to businesses so the economy can get moving again.

The BoE's move came after last week's surprise news that Britain remained in recession during the third quarter, even as the US turned to growth. Most economists expect the euro zone to grow when third quarter figures come out next week.


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