BoE Cuts, ECB Leaves Rates Untouched

LONDON — The European Central Bank stood firm against the headwinds of global economic turmoil, citing the threat of higher inflation as it declined to follow the Bank of England's lead and reduce borrowing costs Thursday for its 15-nation region.

But for the first time, the ECB showed signs that it might bow to those pressures later this year and joining the British central bank and the U.S. Federal Reserve, which have been cutting rates.

The Bank of England lowered its key interest rate by a quarter of a percentage point to 5.25 percent just before the ECB's decision on Thursday, making its second cut in three months and cheering retail and business groups who have called for lower rates to restore consumer confidence in the faltering domestic economy.

There was no such relief for consumers in the euro zone — a bloc of more than 318 million people that accounts for more than 15 percent of the world's gross domestic product — where the ECB held rates steady at 4 percent.

While the euro zone is not immune to any global slowdown linked to the subprime credit crisis in the United States, the ECB has been more concerned with high inflation. A cut in rates to boost growth could also spur inflation as consumer demand increases.

Inflation in the euro-zone hit 3.2 percent in January, its highest level since the euro was adopted and far above the ECB's comfort level of around 2 percent. In contrast, inflation is running at 2.1 percent in Britain, just above the government's target of 2 percent.

ECB President Jean-Claude Trichet said that Thursday's decision to hold rates steady was unanimous, a change from January when a hike was also considered, and noted that risks to growth in the euro zone were on the rise.

"As the reappraisal of risk in financial markets continues, there remains unusually high uncertainty about its overall impact on the real economy," he said.

Trichet added that there was no reason for the bank to start surprising markets and said its actions "will continue to be predictable," comments analysts took as a sign that future rate cuts would be well flagged.

"Markets took stock of some key changes to deem today's meeting as the first concrete signs that the ECB's stance is shifting ... and that a rate cut will be prepared properly," said Aurelio Maccario, co-head of European economics at UniCredit Markets & Investment Banking.

"We now think that chances that the first cut will occur at the end of the second quarter are now higher than a while ago," Maccario added. He expects ECB rates to be down to 3 percent by the first half of 2009.

Analysts at Commerzbank forecast three cuts of a quarter of a percentage point each during the second quarter of the year.

The ECB decision sent the euro to a nearly two-week low against the dollar, reaching $1.4480, its lowest point since Jan. 22, and down from an intraday high of $1.4653. Cutting interest rates can spur the economy, but can also weaken a currency as investors transfer assets to places where they can earn higher returns.

In Britain, the Bank of England's decision to cut rates was widely anticipated by economists who expected concerns about slowing economic activity and financial market turbulence to outweigh conflicting worries about accelerating inflation.

"The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued," the Bank of England said in its accompanying statement.

The cut was welcomed by retail and business groups, but they also called for further reductions in borrowing costs to ease the burden on consumers.

"What's needed is a series of considered, pre-emptive cuts, to avoid the need for Fed-style, last-minute rate-slashing later on," said Stephen Robertson, the director-general of the British Retail Consortium. "Let's be clear — the sooner the bank cuts again, the better for everyone."

The U.S. Federal Reserve 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. It last knocked 1.25 percentage points off the cost of borrowing during the second half of January in response to the threat of a recession.

Global Insight economist Howard Archer said the Bank of England is likely to continue cutting rates as it tackles what Governor Mervyn King has called a "difficult balancing act." Archer expects rates to fall to 4.5 percent by the end of 2008 and to 4 percent in the first half of 2009.

"This is based on our assumption that the U.K. will avoid recession, but will see extended below-trend growth," Archer said.

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AP Business Writer Matt Moore reported from Frankfurt, Germany.

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