European Central Bank leaves interest rates on hold at 4 percent

amplify image

European Central Bank. Photo: EFE

Stocks fell broadly and the dollar and sterling hit record lows against the euro on Thursday as fresh concerns about the health of the banking sector and the broader economy jolted financial markets.

Optimism that the worst of credit crisis may be over tapered off after Lehman Brothers said in a filing with the U.S. Securities and Exchange Commission it had liquidated three funds that had lost value and took a balance sheet hit.

Sterling was at a 11-year low on a trade-weighted basis as the Bank of England cut interest rates, citing concerns about tighter credit conditions and a deteriorating economic outlook.

The BoE's decision to trim rates by a quarter percentage point to 5 percent disappointed some who had bet on a bigger half-point cut. The European Central Bank left interest rates on hold at 4 percent as expected, with its focus firmly on inflation.

The FTSEurofirst 300 index was down 1.3 percent while MSCI main world equity index was down slightly on the day. U.S. stock futures fell half a percent, indicating a weaker start on Wall Street.

Sterling had fallen as far as 80.29 pence per euro and held near that level after the BoE decision. The trade-weighted sterling index is at its weakest since 1996.

"They (BoE) haven't really done that much to address the shortage of liquidity, so that means that, even as they cut the official bank rate, those lower interest rates aren't getting passed on to consumers and other borrowers", said Chris Iggo, strategist at Axa Investment Managers.

"They need to both keep cutting rates and try to improve liquidity and only then will lower interest rates start to affect the real economy".