Vienna : The European Central Bank left interest rates at a record low after Europe's sovereign debt crisis forced it to start buying government bonds.
Policymakers meeting in Frankfurt yesterday kept the benchmark rate at 1 per cent, as predicted by all but one of 59 economists surveyed by Bloomberg News. ECB President Jean-Claude Trichet is under pressure to give details on the bond purchases, which have split the bank's Governing Council and failed to stem a rise in some countries' borrowing costs.
Laurent Bilke, a former ECB forecaster now working for Nomura International in London, said: "Spreads are widening again, so investors are really questioning the ECB's response to the crisis."
Since the ECB announced its bond programme on May 10 to restore "normal functioning" on markets, the extra yield that investors demand to hold Spanish and Italian debt has advanced to euro-era highs.
Portuguese and Irish yields have also risen after their initial drop. Trichet has given no information about how much the ECB plans to spend on government debt or which countries' bonds the central bank is buying.
Bailouts
Critics say the purchases amount to bailing out indebted governments and could fuel inflation, breaching two of the ECB's founding principles and undermining its credibility.
The move divided Trichet's 22-member Governing Council, with Bundesbank President Axel Weber and Executive Board member Juergen Stark openly voicing concern.
The crisis has also forced the ECB to reverse its withdrawal of emergency stimulus measures and prompted economists to push back forecasts for higher interest rates until the second quarter of next year.
While the Bank of Canada this month became the first central bank in the Group of Seven to raise rates since 2008, it signaled the decision won't necessarily be repeated soon, reflecting concern among policy makers worldwide that Europe's debt burden poses a risk to the global economic recovery.
The Federal Reserve will hold off raising borrowing costs until 2011, a survey of economists shows. The Bank of England yesterday kept its benchmark rate at a record low of 0.5 per cent and maintained its bondholdings at £200 billion to nurture growth as Britain braces for public spending cuts.
By purchasing government bonds, Trichet is trying to win time for governments to get on top of their finances and prevent Europe's monetary union from tearing apart. It's far from certain the plan will work.
The difference in yield, or spread, over benchmark German bonds was 557 basis points in Greece yesterday, down from 965 on May 7.
