By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The European Central Bank, as expected, left its key lending rate unchanged at 1.25% on Thursday, setting the stage for ECB President Jean-Claude Trichet’s monthly news conference.
Trichet, who is scheduled to speak at 8:30 a.m. Eastern, is widely expected to use language signaling the bank is prepared to deliver a hike in July.
The euro EURUSD +0.21% traded at $1.4624 versus the dollar, up 0.2% from Wednesday.
Remarks on monetary policy, however, may be overshadowed by Trichet’s comments on Greece. Greek, Irish and Portuguese government bonds came under heavy pressure Wednesday after German Finance Minister Wolfgang Schaeuble, in a letter to the ECB and euro-zone finance ministers, reiterated a call for private bondholders to bear some of the pain of an additional Greek bailout and suggested a seven-year extension of Greek bond maturities.
The call is seen potentially setting up a clash with the ECB, which has sharply opposed any measures that would be considered a default by ratings agencies.
“The potential restructuring is likely to dominate today’s ECB press conference with ECB opposition to any form of rescheduling of debt which could be defined as a default well known,” said Gary Jenkins, head of fixed income at Evolution Securities.
Bank of England stays on hold
Earlier, the Bank of England, as expected, left its key lending rate unchanged Thursday at a record low 0.5% as concerns over the strength of the economic recovery likely outweighed worries about above-target inflation.
The Monetary Policy Committee also left unchanged the bank’s program of securities purchases at 200 billion British pounds ($328.2 billion).
The decision was “no surprise given the recent run of soft activity data and worries about the momentum of the global recovery,” said James Knightley, an economist at ING Bank.
But with inflation likely to top 5% in the coming months, the central bank is still likely to hike rates earlier than expected by financial markets, which have penciled in a move in March, he said.
The British pound GBPUSD +0.15% traded at $1.6425, a gain of 0.2% from Wednesday.
Ideas the Bank of England would begin to tighten monetary policy as early as this spring have faded in the face of softer-than-expected data on the British and global economy, economists said.
“Although we believe a majority of MPC members will move to tighten policy as soon as they are confident that aggregate demand is solid, the demand outlook is far from solid at present,” wrote economists at Barclays Capital.
Gross domestic product grew by 0.5% in the first quarter, merely canceling out a 0.5% decline seen in the final three months of 2010.
Meanwhile, a breakdown of the first-quarter data revealed a slump in consumer spending, which raises concerns about the economy’s ability to withstand the fiscal austerity measures that started to kick in at the beginning of the government’s financial year in April, said Howard Archer, chief U.K. economist at IHS Global Insight.
“Data and survey evidence so far for the second quarter have been somewhat mixed and do little overall to dilute belief that the economy is struggling to generate sustainable decent momentum,” he said.
At the same time, inflation pressures remain, with consumer price inflation jumping to 4.5% in April, more than twice the central bank’s 2% target.
