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FRANKFURT - The European Central Bank and Bank of England kept their key interest rates at record lows of 1.0 percent and 0.5 percent respectively Thursday as directors tracked the prospects of economic recovery.
The BoE said it would pump another 25 billion pounds into Britain's recession-hit economy, while the ECB also kept two other benchmark rates, the marginal lending rate and the deposit rate, unchanged at 1.75 percent and 0.25 percent.
Any rate hikes will have to wait as a strong euro, worsening labour market and potential credit squeeze continue to pressure a budding eurozone recovery, analysts say.
The decisions were widely expected after the US Federal Reserve said on Wednesday that it would hold its own rock-bottom interest rates steady for "an extended period" and kept trillion-dollar stimulus measures in place to support a fragile recovery there.
In Europe, the ECB has provided unlimited loans to commercial banks in a bid to boost credit, and observers watched for signs of a change in this policy, tipped as an early "exit strategy" once the ECB decides to unwind exceptional measures taken amid the global financial crisis.
Such a move was almost certainly not on the bank's immediate agenda however, as economic indicators sent mixed messages on the strength of eurozone business activity.
Retailers in the 16-nation bloc said sales fell again in September, reflecting a downward trend broken only in April, according to official EU data released on Thursday.
Meanwhile private sector business activity grew in October at its fastest rate since 2007, a survey showed on Wednesday.
The purchasing managers' index (PMI) compiled by data and research group Markit, rose to 53.0 points from 51.1 points in September, confirming an earlier estimate. It had ended 14 months of decline in August.
On Tuesday, the European Commission hiked its eurozone growth forecast to 0.7 percent next year and 1.5 percent in 2011 having previously predicted a contraction of 0.1 percent in 2010.
Unemployment is nonetheless set to rise to 10.7 percent next year and 10.9 percent in 2011, the EU commission said.
"The eurozone's economic situation implies that short-term interest rates in all likelihood will remain very low for a long time," Natixis economist Patrick Artus said.
He argued that since commercial banks had loaded up on government bonds with coupons which paid interest of around 3.0 percent, the ECB could not now exceed that limit without putting banks back into financial difficulty.
For now, analysts want to know if an exceptional one-year loan of unlimited central bank funds, known as a long-term refinancing operation and scheduled in December, will be the last.
"We will be watching for clues on the possibility that the ECB will stop carrying out 12-month LTRO after December," UniCredit analyst Davide Stroppa said.
Hitting a peak in June with loans of 442 billion euros -- the largest volume of funds ever provided in a single step -- the policy has helped bring down interbank lending rates.
A potential credit squeeze is still a concern however, though the ECB's latest surveys suggest lending to households and businesses has either begun to pick up or is set to do so in the coming months.
Once central banks are sure lending is back on track and economies are growing on a durable basis, they can begin to consider raising benchmark interest rates.
Most analysts expect that to occur in the second half of 2010.
- AFP/ir
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