ECB and BoE leave rates unchanged

The ECB and BoE left interest rates and monetary policy generally unchanged on Thursday, refraining from following in the footsteps of the BoJ.

Recent economic data possibly warrant the different actions. Unlike Japan where industrial production fell for the third consecutive month in August, industrial production in Europe maintained growth in August, rising by 0.3 percent in the UK and jumping by 1.7 percent in Germany.

Still, an exit from current levels of monetary policy accommodation may be becoming difficult, at least for the ECB, according to a Bloomberg report.

European Central Bank President Jean- Claude Trichet staked his reputation on propping up banks with cheap cash during the financial crisis. Now credit markets won’t let him take away that support.

Near-record borrowing costs for nations across the euro region’s periphery are making it harder for the ECB to wean commercial banks off the lifeline it introduced two years ago. The extra yield that investors demand to hold Irish and Portuguese debt over Germany’s rose last week to 454 basis points and 441 basis points respectively. Spain’s spread hit a two-month high.

The risk for the ECB is that it gets pulled deeper into helping the banking systems of the most indebted nations in the 16-member euro bloc. Governing Council member Ewald Nowotny said Sept. 6 that addiction to ECB liquidity is “a problem” that “needs to be tackled.” Complicating the ECB’s task is that interbank lending rates have risen, tightening credit conditions and making access to market funding more expensive for banks.

Meanwhile, the sovereign debt problems could get worse in coming years. Standard & Poor's thinks that global sovereign borrowing is on an explosive path. Bloomberg reports:

Public debt in some of the world’s largest economies is on an “explosive path” as aging populations and the cost of fighting the financial crisis erode government finances, Standard & Poor’s said.

Based on current fiscal policies, median net debt as a percentage of gross domestic product in 49 economies accounting for more than two-thirds of the world’s population will rise to 245 percent by 2050, the ratings company said in an e-mailed report in London today. That compares with a 2007 forecast of 148 percent.