The European Central Bank and Bank of England left their key interest rates steady on Thursday as most analysts forecast no change for the rest of the year despite recession fears. The ECB left its main interest rate at 4.25 percent, as widely expected. In Britain, the Bank of England kept its main lending rate steady at 5.0 percent, opting against a cut despite a looming recession in Britain in order to keep up the fight against soaring inflation. Attention in Frankfurt turned to a press conference by ECB president Jean-Claude Trichet although most analysts did not expect him to signal any rate cuts in the coming months. Bank of America economist Holger Schmieding said that ECB watchers would listen to hear if the ECB would argue that the “current monetary policy stance will contribute to achieving our objective” of price stability. That, he said would indicate that rates were on hold “almost certainly for October and probably well beyond.” Another code phrase Trichet might repeat is that the ECB had “no bias” towards either raising or lowering the benchmark rate for lending in the 15-nation eurozone. Many, if not most, eurozone countries would like lower interest rates but that would undermine the ECB's primary goal of maintaining price stability. With inflation at 3.8 percent, the ECB's target of just below 2.0 percent is well out of reach, and wage demands could create a second round of price pressures even if oil prices continue to fall from current levels of 108-109 dollars. The powerful German trade union IG Metall has called for pay hikes of at least seven percent, with similar efforts being seen in other eurozone members as workers try to bolster pay packets that have been eroded by rising costs for energy and food. “The all-clear on the inflation front is far from being achieved,” noted UniCredit Markets' chief eurozone economist Aurelio Maccario. Trichet announced that the ECB was cutting its eurozone growth forecasts - for 2008 to 1.4 percent from 1.8 percent previously, and to 1.2 from 1.5 percent for 2009. The ECB in turn raised its 2008 eurozone inflation forecast to 3.5 percent from 3.4 percent previously, with 2009 put at 2.6 percent, up from 2.4 percent. The eurozone economy contracted 0.2 percent in the second quarter and a further reverse in the third quarter would put the eurozone into a recession, defined as two successive quarters of contraction. The Organization for Economic Cooperation and Development (OECD) revised its forecast lower on Tuesday, saying the eurozone economy would expand 1.3 percent this year instead of 1.7 percent. Eurozone activity has been slowed by high commodity prices, the euro's strength against other currencies, slumping global demand and tighter credit conditions. Meanwhile, in Toronto, the Bank of Canada held its key interest rate unchanged at 3 percent on Wednesday and gave no indication of future interest rate move. The central bank said the Canadian economy has weakened, but not enough to cut interest rates. Economists had widely expected the bank to keep rates unchanged. Canada's overnight rate has remained at 3 percent since sharp half-point cuts in March and April. “The bank judges that the current level of the target for the overnight rate remains appropriately accommodative,” the bank said. The bank said the current level of interest rates is appropriate to bring core inflation down to its 2 percent target by the second half of 2009. Bank governor Mark Carney said the temporary inflation spike the bank had been expecting will also be lower than projected because of lower energy prices. Oil was trading above $140 a barrel in July, but has since declined to around $108. The decline means the bank's July expectation that inflation will move above 4 percent will not happen, the statement said. The bank did say commodity prices are expected to remain volatile. While the economy has weakened slightly and domestic demand has slowed, the bank said the economy remains near its production capacity. “Domestic demand has slowed modestly but remains strong. It continues to be supported by financial conditions that remain significantly better than those in most other major economies and by income gains,” the bank said. “Overall, the level of economic activity is slightly lower than expected in July but still close to the economy's production capacity.” The bank's next interest rate decision will be made on Oct. 21. The bank didn't include its traditional assessment of the risks facing the bank's forecast. “There is absolutely no signal here whatsoever they are preparing to cut rates,” said Douglas Porter, deputy chief economist with BMO Capital Markets. Porter thinks the central bank believes that having cut 1.5 percentage points since December, it has cut interest rates deep enough. “I think it would take a very severe weakening in the global economy from here to prompt the bank to cut rates further,” Porter said. “I think their view is that they've already cut rates by a percentage point and a half. Rates are already relatively low. While they are not going to raise rates any time soon, they also don't seem to have a lot of appetite to cut rates.” Carney is a former Goldman Sachs executive who took over the central bank's top post on Feb. 1 from David Dodge.
