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ECB, Britain’s central bank leave rates unchanged

This comes as US Fed pumps $48b into banking system to bring down lending rate LONDON – THE European Central Bank (ECB) and Bank of England (BOE) held interest rates steady yesterday, saying it was too soon to gauge the damage wrought by a global credit crisis.

The ECB also pumped 42.2 billion euros (S$87.6 billion) into money markets to lower borrowing costs and said there was more to come.

Across the Atlantic, the United States Federal Reserve added US$31.25 billion (S$47.8 billion) to the banking system, the most in almost a month, pushing down the overnight lending rate to the central bank’s target of 5.25 per cent.

The cash infusion was the largest since the Fed added US$38 billion in reserves on Aug 10.

After leaving euro zone rates at 4 per cent, ECB president Jean-Claude Trichet cast doubt on further increases, dropping his key phrase ‘strong vigilance’ that he has consistently used to signal a looming hike and pledging to watch developments in turbulent financial markets closely.

‘Given the high level of uncertainty, additional information is needed before further conclusions for monetary policy can be drawn,’ he told a news conference.

The BOE left its rate at 5.75 per cent and issued a statement saying it was too soon to fathom the crisis’ impact on the British economy.

Before the liquidity crisis, stemming from mass defaults on US sub-prime mortgages, both central banks had been expected to tighten policy again.

‘Heightened concerns about a variety of asset-backed securities have led to disruption around the world, not only in markets for those financial instruments but also in money markets more generally,’ the BOE said.

‘It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households.’

On Wednesday, the BOE acted for the first time to temper sky-high money market rates, something which other central banks have been attempting for a month with limited success.

Mr Trichet said the ECB would hold an extra tender to allot three-month refinancing for euro zone banks on Wednesday to ease money market conditions, which have seen rates soar to a near six-year high above 4.5 per cent.

‘This operation aims to support a normalisation of the functioning of the euro money market,’ the ECB said in a statement.

The global credit squeeze remained as tight as ever.

Banks have shied away from lending over the past month, as they scrambled to calculate exposure to the US sub-prime mortgage sector.

Source: REUTERS, BLOOMBERG NEWS (The Straits Times 7 Sept 07)

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