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Bank of England cuts a key interest rate

The Bank of England lowered its key interest rate by a quarter percentage point to 5.25 percent on Thursday, its second cut in three months, while the ECB held its rate steady.
/ Source: The Associated Press

The Bank of England lowered its key interest rate by a quarter percentage point to 5.25 percent on Thursday, its second cut in three months.

Shortly after, the European Central Bank (ECB) said it has opted to keep its own rate unchanged at 4 percent.

In London, the Bank of England cut its benchmark rate from 5.5 percent, a move aimed at shoring up confidence in Britain’s slowing economy.

“The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued,” the central bank said in its accompanying statement.

The two central banks are facing similar quandaries — but were widely expected to take different paths in making interest rate decisions on Thursday.

Bank of England Governor Mervyn King has acknowledged that the bank is facing a “difficult balancing act,” with inflationary pressures from higher energy and food prices and a falling British pound weighed against data showing slowing economic activity and turbulence on financial markets.

In the United States, the Fed has cut rates five times since September in an effort to spur the economy and encourage reluctant banks to issue credit to each other, companies or consumers.

In Frankfurt, the ECB, which oversees the 15-nation euro zone — a bloc of more than 318 million people that accounts for more than 15 percent of the world’s gross domestic product — has stood firm against growing winds of uncertainty about the global economy.

But the ECB may not be able to stand against the wind much longer. While it is expected to hold its main rate at 4 percent on Thursday — some analysts think the ECB will have to bow to other factors and start reducing rates this year.

“Decoupling is unrealistic. It has already proven unrealistic,” said Joerg Kraemer, the chief economist at Commerzbank AG, adding that Europe and the U.S. are still sufficiently tied together that a slowdown in one has ripple effects across the Atlantic.

Jean Claude-Trichet, president of the ECB since 2003 and set to remain so through 2011, has been fiercely defensive in the past about suggestions that the bank — which sets monetary policy for the 15 nations that use the euro currency — is susceptible to any outside pressure from politicians or other institutions such as the U.S. Federal Reserve.

The bank’s specific mandate is to control inflation, which hit an all-time high in January of 3.2 percent, its highest level since the euro was adopted and far above the ECB’s comfort level of around 2 percent. Even more worrying were the findings by Eurostat that business and consumer confidence fell to their lowest levels in two years, raising the possibility of “stagflation,” or higher prices and stagnant growth.

“I agree, it is at first sight ... somewhat puzzling that (the) ECB council members’ position has remained more or less unchanged in recent weeks, i.e. it was unaffected by the bold steps of the Fed and other events that might have changed the bank’s assessment,” said Michael Shubert, an economist at Commerzbank.

He said the bank’s stand has more to do with concerns about second-round inflation concerns, such as big wage hike demands from unions, weighing more heavily on their actions.

But he said that murmurs of a rate cut are drawing attention.

“It is interesting to hear that, according to unnamed ECB officials, the bank may ’examine the possibility’ of a rate cut later in the year, but needed a clear ’picture on economic trends, inflation, market turbulences and external factors,”’ he said.

Because of that, comments by the governing council’s members won’t hold sway, but instead data on inflation and growth will decide the bank’s course of action.

“Our expectations of a marked deterioration of economic indicators and no excessive wage payments on average pave the way for rate cuts as of the second quarter,” he said.