Fed and ECB leave key rates unchanged

BOTH THE US Federal Reserve and the European Central Bank left key interest rates unchanged yesterday, as policy-makers paused for breath after recent aggressive rate cuts.

The Dow Jones slipped lower after the Fed said there would be no change in either its funds rate or its discount rate, currently at 4.75 per cent and 4.5 per cent respectively.

The Fed has cut rates three times over the last three months in an attempt to calm the world's nervous financial markets.

Meanwhile in Frankfurt, Wim Duisenberg, the ECB president who earlier this month co-ordinated a surprise cut in European rates, said he saw no immediate need for further rate reductions.

As expected, the ECB set its initial benchmark interest rate for the countries which will adopt the euro in January at 3 per cent.

Mr Duisenberg said: "This should be seen as a clear indication that the ECB does not want to give any signal for further easing in the foreseeable future." However, Mr Duisenberg did announce temporary changes to two other European interest rates, a move designed to inject liquidity into the banking system during the first few weeks of the euro's life. The rate changes should help eliminate volatility in the financial markets.

Between 4 January and 21 January, the ECB's emergency borrowing rate will be 3.25 per cent and its deposit rate will be 2.75 per cent. After 21 January these rates will change to 4 per cent and 2 per cent respectively.

Sharda Persaud at Paribas said: "This is an ultra-cautious move by the European Central Bank, which is a little worried about volatility in the market at the beginning of the year. It's probably not really necessary, it's simply a precautionary step."

Data released in France and Germany yesterday revealed further sharp falls in factory gate prices on the Continent.