FRANKFURT — The European Central Bank and the Bank of England left their benchmark rates at historic lows on Thursday.
The European Central Bank kept its benchmark interest rate at 1 percent, where it has been for more than a year, as the euro area’s sovereign debt crisis pushed any inkling of monetary tightening far into the future.
And the Bank of England kept its benchmark interest rate at 0.5 percent to support a weak economy as the government is preparing for large spending cuts.
The bank’s policy committee also voted to leave its asset purchasing program at £200 billion, or $290 billion, the Bank of England said in a brief statement.
Most European Central Bank watchers do not expect rates to rise until well into 2011, and would have been shocked had the bank taken action Thursday.
The bank’s president, Jean-Claude Trichet, is scheduled to give a news conference later where he that is expected to focus on the bank’s unprecedented purchases of government and corporate bonds.
As of last Friday the European Central Bank had purchased bonds worth 40.5 billion euros, or about $49 billion, on open markets. But the bank has been criticized for not saying what kinds of bonds it is buying or how much it will buy in the future.
Der Spiegel, the German magazine, has quoted Bundesbank insiders as saying the program is being used to allow French banks to unload their holdings of Greek bonds.
The Bundesbank denied the report. However, it is clear there are tensions within the central bank after Axel Weber, president of the Bundesbank and a member of the bank’s rate-setting Governing Council, publicly criticized the decision on May 10 to start buying bonds.
The debt crisis and debate about how to deal with it has also fueled tension between France and Germany, the euro area’s two largest countries.
Analysts will also be listening for any comments by Mr. Trichet on the state of the European banking system. There are signs that interbank lending has withered as banks become uncertain which other banks may hold toxic sovereign debt.
In another indication of tension in the money markets, banks have been depositing record sums at the European Central Bank, where the cash earns 0.25 percent interest, rather than risk lending to each other.
The bank has been providing banks with almost unlimited loans at 1 percent interest since October 2008 after the collapse of Lehman Brothers brought interbank lending practically to a standstill.
In Britain, the pound has taken a beating against the dollar and the euro because of renewed concern among some investors that Britain is not acting quickly enough to reduce its giant budget deficit.
Fitch Ratings said Tuesday that Britain’s fiscal problems were “formidable” and that “a faster pace of deficit reduction” was warranted. Credit rating agencies are monitoring Britain’s efforts to reduce its deficit after downgrading the rankings of Greece, Spain and Portugal.
Prime Minister David Cameron on Monday warned voters that planned spending cuts would be the deepest in a generation and “affect every single person in the country.”
The chancellor of the Exchequer, George Osborne, is expected to present an emergency budget on June 22, detailing how he plans to reduce the budget deficit that rose to more than 11 percent of gross domestic product. Britain could be paying more than $100 billion a year in interest in five years if the debt is not reduced, the Treasury said.
“Pretty muted and fragile economic recovery, a looming major tightening of fiscal policy and the threat to U.K. growth coming from the euro zone’s woes outweighed the pressure for tighter monetary policy coming from consumer price inflation,” Howard Archer, an economist at HIS Global Insight in London, said Thursday.
Retail spending rose in May and house prices remained relatively high because of a lack of properties for sale, but some economists said such encouraging signs were not enough to help Britain reduce its deficit through economic growth.
The weakening of the pound against the dollar is making British products more attractive abroad, but that has yet to translate into a permanent benefit for the economy.
In fact, British exporters suffered as economic woes in the 16 countries that share the euro hurt consumer demand. The euro has dropped more than 6 percent against the pound since the beginning of the year. As a result, Britain’s trade deficit did not narrow in April for the first time in three months.
