Key interest rate meetings will put Europe's two major central banks in sharp contrast Thursday, with the Bank of England expected to cut aggressively to combat the deepening recession while the more cautious European Central Bank holds off, according to AP. Britain is confronting its worst recession since 1980, with the economy shrinking 1.5 percent in the fourth quarter, and analysts think the Bank of England may reduce rates by as much as a half percentage point at a meeting of its monetary policy committee. That would take its benchmark rate to a fresh historic low of 1 percent. ECB President Jean-Claude Trichet, on the other hand, squelched any speculation of a rate move at the ECB's last rate-setting meeting by saying after January's meeting that the «next important rendezvous would be in March.» Analysts think that the European Central Bank would like to see fourth quarter 2008 growth figures by Feb. 13 from the 16 nations that make up the euro zone before deciding to trim rates again. With exports plummeting amid sinking global demand and consumer confidence battered by the financial crisis and bank bailouts, the figures will likely make for grim reading. There's also a feeling in the markets that the European Central Bank is uncomfortable with taking interest rates to the super-low levels already found in the U.S. and Japan. It cut rates by a half-point to 2 percent in January but lags the Bank of England, which is at 1.5 percent and could be headed for zero, while the U.S. Federal Reserve has its key rate at zero to 0.25 percent. «The discomfort seems at odds with international central banking best practice,» said David Page, European economist at Investec Securities.» Though the European Central Bank has given no real explanation as to why it is averse to pushing interest rates towards zero percent, Page thinks one reason may be concerns that low interest rates will undermine incentives to holding longer-term deposits, potentially depriving banks of capital which could be used for lending. Moreover, there is a growing feeling in the markets that the European Central Bank would find it far more difficult than other central banks to provide a monetary stimulus through unconventional monetary measures once interest rates have fallen to, or near, zero percent. While the European Central Bank's Trichet has indicated that all policy options remain on the table, many analysts think the ECB would be entering a financial quagmire were it to start buying up toxic bank assets across the 16 member states. Rate-setters at the Bank of England seem to be less concerned about the likelihood of interest rates falling towards zero and are expected to reduce the benchmark rate by another half percentage point to a fresh all-time low of 1.0 percent. As recently as early October, the Bank of England's main rate was 5 percent. «The deterioration in economic activity, increasing deflationary pressures and impaired credit channels should be sufficient to secure a half-percentage point cut,» said Ross Walker, an economist at the Royal Bank of Scotland. Since October, the British economy has gone from bad to worse with the banking crisis spreading to other sectors of the economy and output sinking fast and the pound falling sharply against a range of currencies. The Bank of England's governor Mervyn King has even begun to talk of using unconventional monetary policy measures once the scope for further interest rate cuts has been used up. Last week the British government gave the Bank of England the green light to start buying up to 50 billion pounds worth of «high quality» financial assets from the banks, such as corporate bonds and commercial paper, in an attempt to shore up confidence in the banking system and get them to start lending again. Because the government will be issuing debt to pay for the so-called Asset Purchase Facility, it should not have any impact on the quantity of money in the economy. However, expanding the monetary base, which is considered to be inflationary, could soon be a weapon in the Bank of England's armoury as soon as interest rate reductions have been exhausted. King said last week following confirmation of the Asset Purchase Facility, that the Monetary Policy Committee will keep under review whether it wishes to undertake asset purchases as a means of meeting the government's 2 percent annual inflation target. With inflation falling sharply, King indicated that the Bank of England may have to start printing money to avoid a bout of deflation _ a corrosive spiral of declining prices. At present, inflation stands at 3.1 percent and is widely expected to drop over the coming months to near zero, or even below.
