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ECB, Bank of England leave rates unchanged

The European Central Bank left its key interest rate steady at 4 percent on Thursday as the bank’s president said inflation was expected to remain high. Britain’s central bank followed suit.
/ Source: The Associated Press

The European Central Bank left its key interest rate steady at 4 percent on Thursday as the bank’s president said inflation was expected to remain high. Britain’s central bank kept its main rate unchanged at 5 percent.

Analysts had expected Thursday’s decision by both banks as evidence mounted that growth in the euro zone and in Britain is likely to slow in coming months.

ECB president Jean-Claude Trichet told reporters the bank held the line in light of inflation in the 15-nation euro zone, which had risen as high as 3.6 percent this year before dipping back to 3.3 percent in April.

“As we have said on previous occasions, inflation rates are expected to remain high for a rather protracted period of time, before gradually declining again,” he said, a suggestion that no rate cuts are coming soon.

Trichet said that the decision was unanimous and in his comments, reinforced the bank’s holding stance by leaving out the word “vigilance,” a term that has previously signified an impending rate decision.

Asked about the omission of the term this time, he said it hadn’t disappeared from the bank’s vocabulary, and that it was an expression that could be used when necessary.

While the U.S. Federal Reserve has lowered rates seven times in seven months to 2 percent, the ECB has been content to stand pat to try to combat rising inflation in the 15-nation bloc of 317 million people, which accounts for 22 percent of global gross domestic product — more than Japan and China and below the U.S. at 27 percent.

“While the U.S. economy has succumbed to stagnation and the U.K. economy is decelerating sharply, the euro zone has so far held up fairly well,” said Holger Schmieding, Bank of America’s chief European economist. “For the time being, that is until the summer break ends in September, the ECB is probably firmly on hold,” he said.

In London, the Bank of England shied away from back-to-back trims amid conflicting pressure from slowing economic growth and inflation worries.

The decision to keep rates on hold was anticipated by most analysts after the bank’s monetary policy committee made a quarter of a percentage point cut last month. The bank had to balance its decision with concern about inflation that remains above target levels.

“Current elevated inflation levels and risks deterred the MPC from cutting interest rates for a second successive month in May despite mounting signs that the U.K. economic downturn is deepening and widening amid ongoing tight credit conditions,” said Global Insight economist Howard Archer.

Chiara Corsa, a UniCredit economist in Milan, said that the BoE was “well aware that, against the backdrop of tighter credit conditions, growth momentum will definitely lose steam.”

It’s a similar quandary for the ECB now that inflation in the euro zone has slipped to 3.3 percent in April — still well above the ECB’s own guideline of just under 2 percent. The bank is also pointedly concerned about the fluctuation in exchange rates, including the record setting euro, and what it may portend for future economic stability.

The euro reached a record $1.6018 on April 23 after a pair of ECB governors said that high inflation could cause the bank to raise interest rates. They quickly backed off the assertion and the euro has since slid to around $1.55 this week.

Higher rates, used to combat inflation, also can strengthen a currency and are considered to be supporting the euro.