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European Central Bank hold rates steady

The European Central Bank and Bank of England, despite growing unease about inflation and slowing economic indicators, kept their benchmark interest rates unchanged Thursday.
/ Source: The Associated Press

The European Central Bank and Bank of England, despite growing unease about inflation and slowing economic indicators, kept their benchmark interest rates unchanged Thursday.

But ECB president Jean-Claude Trichet told reporters the European bank is ready to act "preemptively" to counter inflation in the 15-nation euro zone, which is home to 318 million residents and accounts for more than 15 percent of the world's gross domestic product.

Trichet, speaking to reporters after the bank decided to keep its benchmark refinancing rate unchanged at 4 percent, said the ECB "remains prepared to act preemptively so that second-round and upside risks to price stability" do not materialize.

That is blunt language warning that should the bank deem it necessary, it is ready to lift its key interest rate.

Earlier, the Bank of England held its key rate steady at 5.5 percent, resisting a growing chorus for a cut amid mounting signs of a consumer-led economic slowdown.

Most analysts expected the ECB would hold rates steady, but said the Bank of England faced a closer call.

The ECB's benchmark refinancing rate has stood at 4 percent since last June.

With people paying more for energy and food, the ECB faces inflation estimated at 3.1 percent — well above its guideline of just under 2 percent — but also must contend with sliding business and consumer confidence amid jittery markets.

The ECB considers fighting inflation its main mission, but also is mindful of the broader economic context _ in which its fellow central banks have been cutting rates, and European businesses and politicians have fretted about the impact of competitiveness of the euro's strength against the U.S. dollar. The bank has pumped billions of euros into the system to keep banks calm.

The U.S. Federal Reserve has cut its key three times over recent months to 4.25 percent.

The Bank of England weighed data showing poor retail sales and falling house prices against the threat of higher inflation from soaring oil prices and rising food costs.

The decision to keep rates on hold also gives the bank more time to assess the impact of last month's quarter of a percentage point cut — the first in more than two years — from a six-year high of 5.75 percent.

The bank has been under growing pressure from retail and business leaders to take rates lower to prevent a consumer-led slowdown in the economy and most economists now expect a cut next month, when policymakers will have more detail on both growth and inflation forecasts.

The global credit crisis that dried up money markets in the late summer has rattled consumers in Britain, where homeowners were already feeling the effects of a series of interest rate hikes last year.

There has been clear evidence of a slowdown in both the housing market, following a 10-year price boom, and in retail spending.

Prime Minister Gordon Brown appeared to support the case for an easing by the independent central bank, saying at his monthly news conference on Monday that Britain's low inflation rate had given the bank "flexibility" to make its decisions.

However, inflation remains a concern for the Bank of England, which is tasked with maintaining the government's target of 2 percent or less. It is currently running at 2.1 percent, and fears remain about the effects of high oil prices and rising food and energy costs.