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ECB, BoE to make rate decisions

September 4, 2008

FRANKFURT, Germany (AP) — The European Central Bank and Bank of England will likely leave interest rates unchanged on Thursday, as they face mounting inflation and slowing growth.

A giant Euro logo stands in front of the European Central Bank headquarters in Frankfurt. A giant Euro logo stands in front of the European Central Bank headquarters in Frankfurt.

The ECB in July moved to cool inflation by increasing borrowing costs for the first time in a year to 4.25 percent for the 15 countries that use the euro.

The Bank of England has left rates unchanged at 5 percent since April, when it reduced its benchmark figure by a quarter of a percentage point.

“Upon leaving rates at 4.25 percent this Thursday, the ECB will probably refute market hopes for a rate cut in the near future,” Bank of America Economist Holger Schmieding said in a research note.

The meeting comes after Eurostat said Wednesday that falling exports and lower household spending caused the euro zone economy to shrink by 0.2 percent in the second quarter. The euro zone economy comprises a bloc of 320 million people that accounts for more than 15 percent of the world’s gross domestic product.

The culprit? Higher fuel and food prices that have held consumers back from making more purchases, hitting one of the main drivers of economic growth as a strong euro, a slower world economy and increased transport costs put the brake on exports to other nations.

That, Schmieding said, means it is likely ECB President Jean Claude Trichet will send the signal that no cuts or increases are expected until the end of the year at the least.

Schmieding also said he expected the bank to cut its 2008 and 2009 growth forecasts, making only slight changes to its outlook on inflation.

Meanwhile, Britain is experiencing a similar quandary with rising prices and weakening growth.

The pound has continued to fall to new lows against the euro and the dollar after Britain’s Treasury chief Alistair Darling said the country was facing its worst economic crisis in 60 years. This week, the Organization for Economic Cooperation and Development said the U.K. economy is likely to fall into a recession this year.

With inflation running at 4.4 percent, double the target, due in part to imported high energy and food prices, the Bank of England has so far ruled out further rate cuts. It had made two trims earlier in the year for fear of spurring inflation yet higher.

However, members of the bank’s monetary policy committee have recently become markedly more concerned about the state of the economy, leading to increasing speculation that a cut in the cost of lending is on the way by the end of the year.

Bank governor Mervyn King acknowledged last month that two negative quarters of economic growth — the working definition of a recession — was very possible.

Committee member David Blanchflower, who has voted for a quarter of a percentage point cut for the past three months, has said he is concerned that an extended and deep recession is possible unless interest rates are cut soon and by a significant amount.

“It now seems a question of when, rather than will, the Bank of England cut interest rates,” said Global Insight economist Howard Archer, adding that he expects a cut before the end of 2008.

On Tuesday, the Reserve Bank of Australia reduced its benchmark interest rate by a quarter percentage point to 7.0 percent — its first cut in seven years amid slowing economic growth.

Written by Hisham · Filed Under WORLD BUSINESS | Leave a Comment