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Status quo on rates in the euro zone

The European Central Bank (ECB) has not changed its interest rates today, resisting pressure for a monetary gesture to stimulate a European economy that shows some early signs of recovering from the recession.

The ECB also said that it will make bond repurchase directly from the market from July to June 2010. The Bank of England is also observing a similar monetary status quo, keeping its intervention rate to 0.5%. Denmark announced a symbolic rate cut of 10 basis points to 1.55%.

The Bank of England said that it is continuing its program of acquisition of £125 billion ($143 billion) in Bonds to stem the recession.  ECB’s Chairman Jean-Claude Trichet announced Thursday the operating procedures of the operation for the European Union. The purchases, totaling €60 billion euros will be distributed throughout the euro area and it will be direct repurchases.

Considering that the risks to the economic outlook are broadly balanced, Trichet also believe that after a very weak first quarter, the economic contraction for the remainder of the year will be probably at less severe rates.

The Federal Reserve which, as the BoE and the Bank of Japan has cut rates below the threshold of 1% corresponding to the refinancing rate of the ECB is already examining the possibility of increasing rates to curb the enormous impact of its massive easing of the recent months.

The average interest rate on the planet in general has never been so low, and Central Banks will soon have to face the difficult issue of how to absorb the massive liquidity that has flown into the markets during the past year.

Today’s signs of slowing of the recession included unemployment numbers in the U.S. that fell for the third week in a row and retail sales in the euro zone that rose in April for the first time in five months, which bodes well for consumer spending despite the recession, even if this recovery is slow.

These good news led to today’s rally on Wall Street ( the Dow Jones was up 0.86%). The bull market continues, with its corollary of greenback weakness (EUR/USD=141.82).

Other good macroeconomic news were that housing  prices rose in May in Great Britain at their most sustained pace in six and a half years.

Long bond yields rose as the markets must absorb large offers of sovereign debt related to the various economic plans put in place around the world. This could later lead to fear that the rise in long rates may stifle the beginnings of the recovery.

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