The European Central Bank and the Bank of England, both facing inflation and concerns about an economic slowdown, took divergent paths on their benchmark interest rates yesterday.
The Bank of England lowered its key interest rate to 5.25 per cent, its second decrease in the past three months, while the European Central Bank left its benchmark rate unchanged at four per cent, where it has stood since June 2007.
At a press conference after the ECB’s decision was announced, bank president Jean-Claude Trichet said the decision to keep the rate unchanged was unanimous and said there was no talk of either lowering rates or raising them. “There was no call for increase of rates or decrease of rates. That does not mean that we did not discuss very thoroughly all the elements that are making up the situation,” he said.
Trichet said the bank’s governing council would “very closely monitor” conditions in the euro zone and said there was no reason for the bank to start surprising markets. He added that the bank “will continue to be predictable” in the future.
That appeared to be a nod to a growing sentiment among a large number of analysts that the bank may have to cut rates later this year despite the rising level of inflation in the 15-nation euro zone – a bloc of more than 318 million people that accounts for more than 15 per cent of the world’s gross domestic product.
However, Trichet said it was “naive” to claim to know what the ECB would do in advance.
The decision by the ECB affected the euro, which fell to a nearly two-week low against the dollar, reaching $1.4480 (Dh5.131), its lowest point since January 22, and down from an intraday high of $1.4653.
Cutting interest rates can spur the economy, but at the same time weaken a currency as traders transfer funds to assets where they can earn higher returns.
“While an interest-rate hike now seems off the agenda, the ECB appears to be equally unwilling to countenance interest rate cuts for now, particularly given its concern that current higher inflation levels and tighter labour markets could lead to higher wages,” said Howard Archer, Global Insight’s chief United Kingdom and European economist.
The Bank of England’s decision was expected given that its governor, Mervyn King has acknowledged that the bank is facing a “difficult balancing act”, with inflationary pressures from higher energy and food prices and a falling British pound weighed against data showing slowing economic activity and turbulence on financial markets.
In the United States, the Fed has cut rates five times since September in an effort to spur the economy and encourage reluctant banks to issue credit to each other, companies or consumers.
But the ECB’s specific mandate is to control inflation, which hit an all-time high in January of 3.2 per cent, its highest level since the euro was adopted and far above the ECB’s comfort level of around two per cent. Even more worrying were the findings by Eurostat that business and consumer confidence fell to their lowest levels in two years, raising the possibility of “stagflation”, or higher prices and stagnant growth.
The ECB will have its own staff projections prepared for its meeting in March. (AP)
ECB and BoE on different rate paths