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BoE, ECB hold Rates Steady
Agencies
Published in The Saudi Gazette on 07 - 03 - 2008

The Bank of England and the The European Central Bank on Thursday kept their key interest rates unchanged at 5.25 percent and 4 percent, respectively, as the central banks opted for a wait-and-see approach to rising inflation and slowing growth.
The announcement was in line with market expectations for no change and followed a quarter-point cut in February that came amid growing concerns over the risk of a sharp slowdown in economic activity.
“Current elevated inflation risks meant that it was too soon for the Bank of England to be comfortable about cutting interest rates again despite serious concerns about the growth outlook,” said Global Insight economist Howard Archer.
The British central bank refrained from cutting rates this month because of simmering inflationary pressures which stem from record high oil prices, surging food costs and rising household bills, analysts said.
The BoE's chief job is to keep 12-month inflation close to a government-set target of 2.0 percent. Annual inflation rose to 2.2 percent in January from 2.1 percent in December.
At the same time, economists agree that the BoE may have to cut rates again in the coming months to combat the prospect of slower economic growth.
As is traditional when the nine-member MPC makes no change to the “repo” rate, economists must wait for publication of the meeting's minutes, which is due March 19, for official comment on the decision.
The repo lending rate is the rate of interest at which the BoE lends to commercial banks.
The Frankfurt-based ECB left the benchmark refinancing rate at 4 percent, even as a weakening economy may force policy makers to reduce borrowing costs in June, a separate survey shows.
“Inflation remains the overriding concern for now,'” said Laurent Bilke, an economist at Lehman Brothers Inc. in London who used to work as a forecaster at the ECB. “But the economic slowdown will eventually force the bank to cut rates.”
So far, the euro-area economy is coping with record oil prices, the euro's 17 percent gain against the dollar in the past year and slowing growth in the US, its second-biggest trading partner.
That's allowing ECB President Jean-Claude Trichet to focus on fighting inflation, which at 3.2 percent is running at the fastest pace since the euro's debut in 1999.
ECB council member Axel Weber said last week that investors betting on rate cuts in Europe are “clearly” underestimating the threat of inflation, which won't slow as much as previously forecast.
The bank will revise up its inflation forecasts from 2.5 percent for 2008 and 1.8 percent for 2009, said Eric Nielsen, chief European economist at Goldman Sachs Inc. in London.
The ECB aims to keep inflation just below 2 percent.
“The 2009 inflation forecast is particularly important because of the risk of them moving all the way to 2 percent, above their target and a huge political message,” Nielsen said.
ECB officials including Executive Board member Lorenzo Bini Smaghi have signaled the bank may also revise down its forecasts for economic growth. In December, it expected the economy to expand about 2 percent this year.
Reports in the past two weeks suggest growth is holding up. Expansion in Europe's service industries accelerated in February, unemployment fell to the lowest since records began in 1993 and business confidence in Germany, the region's largest economy, unexpectedly rose for a second month.
Economic confidence fell more than economists expected last month and the benchmark Stoxx 600 share index has fallen 14 percent this year.
The US Federal Reserve has reduced its key rate five times in the last six months, including an emergency 0.75 percentage-point cut on Jan. 22, as the world's biggest economy reels from its worst housing slump in a quarter century.
The Bank of Canada on March 4 lowered its benchmark rate by half a point to 3.5 percent, the lowest in two years. __


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