BoE keeps rates unchanged, ECB likely to follow

[August 06, 2009]  FRANKFURT (AP) -- The European Central Bank was likely to keep interest rates the same Thursday amid early signs of economic recovery, while the Bank of England said it would expand its asset purchases aimed at increasing the money supply.

The BoE kept its interest rate unchanged at 0.5 percent while analysts expect the ECB to leave its own rate at 1 percent.

Recent economic data in both the euro zone -- a block of some 320 million people comprising nearly 17 percent of the world's output -- and Britain have suggested early signs of an economic turnaround.

In response, the Bank of England said it would expand its asset purchase program by 50 billion pounds to 175 billion pounds, part of its so-called quantitative easing program to stimulate growth by boosting the domestic money supply.

Increasing the supply of money can stimulate growth, but risks worsening inflation down the road. It comes on top of steep cuts in interest rates -- the usual tool for boosting the economy.

The ECB, meanwhile, mindful of some signs of economic recovery, will consider European Union statistics that last week showed unemployment in the euro zone countries rose to a level not seen in a decade and consumer prices slipping more than expected. Eurostat said it estimated consumer prices fell 0.6 percent in July compared with the year-ago period.

Meanwhile, the office said unemployment rose to 9.4 percent in June -- the highest level since June 1999 -- after 9.3 percent in May.

Still, analysts anticipate the bank will keep rates on hold and not announce any new measures on "enhanced credit support," the ECB's version of quantitative easing.

"We suspect the ECB will enjoy the luxury of a relatively non-contentious get-together," Calyon Credit Agricole analysts said in a note to clients.

"Inflation may have been lower than expected, but there has been nothing to force any major reassessment," Calyon said.

In May, the ECB announced it would buy euro60 billion ($86.4 billion) in covered bonds, a relatively safe way to provide markets with more cash. The program is ongoing and the ECB said earlier this week it's spent just euro4.9 billion of the allotted money so far. The bank could announce more details about the ongoing program Thursday.

Though many observers have begun to speculate about exit strategies away from the "extraordinary measures" the ECB has undertaken in concert with the BoE, U.S. Federal Reserve and others, UniCredit's chief economist Aurelio Maccario said interbank lending is still far from past levels and the "exit is not nigh."

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On the Net:

http://www.ecb.int/

http://www.bankofengland.co.uk/

[Associated Press; By GEORGE FREY and JANE WARDELL]

AP Business Writer Jane Wardell reported from London.

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