Bank of England, ECB expected to keep rates unchanged
The European Central Bank and the Bank of England are both expected to keep their interest rates unchanged Thursday, as more evidence mounts that growth in the euro zone and in Britain is likely to slow in coming months.
For the ECB, which meets in Athens _ part of its twice-a-year road show to other euro zone capitals _ the change in scenery is not going to mean a change in policy for its benchmark refinancing rate, which has stood at 4 percent since last summer.
Higher rates, used to combat inflation, also can strengthen a currency and are considered to be supporting the euro.
While the U.S. Federal Reserve has reduced its key federal funds rate seven times in seven months to 2 percent, the ECB has been content to stand pat to try and combat rising inflation in the bloc of 317 million people, which accounts for more than 15 percent of the world's gross domestic product.
'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.
Analysts agree, with all 50 polled by Dow Jones Newswires unanimous that the bank will keep its rate unchanged. Just less than half of them, or 22, expect a rate cut by the end of September, while 34 expect a move downward closer to Christmas.
The Bank of England lowered its key rate a quarter percentage point to 5 percent last month, but most analysts agree that back-to-back cuts are unlikely, as fears of slowing growth in Britain, lower industrial production and a slight slowdown in GDP growth, along with a deteriorating housing market take hold.
Howard Archer, an economist at Global Insight, said the bank may be forced to wait because it has to juggle slowing growth with mounting inflationary pressure.
Chiara Corsa, a UniCredit economist in Milan, said the BoE is '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 back to 3.3 percent in April from 3.6 percent in March _ 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.
'We are concerned about the possible implications for financial and economic stability,' ECB President Jean-Claude Trichet said April 24 on the sidelines of an ECB conference, adding that it was important that U.S. government officials keep close to statements that a strong dollar benefits their own interests.
The euro reached a record $1.6018 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.
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AP Business Writer Matt Moore reported from Frankfurt, Germany.
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On the Net:
European Central Bank: http://www.ecb.int
Bank of England: http://www.bankofengland.co.uk
Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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