ECB, BoE leave interest rates unchanged

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FRANKFURT — The European Central Bank and the Bank of England left their benchmark interest rates unchanged Thursday under conflicting pressure from higher inflation and mounting concern about growth.

Speaking to reporters after the ECB left its interest rate unchanged at 4.25 percent, ECB President Jean-Claude Trichet warned that inflation — which reached 4.1 percent in the euro zone in July — would remain well above its preferred level of about 2 percent for some time.

But he also acknowledged worries about growth across the euro zone, an admission that helped push the euro to a seven-week low against the dollar to $1.5353.

He said information since the bank's July meeting showed growth figures for mid-2008 and the third quarter would be substantially weaker than in the first quarter, as the bank had previously forecast. The lower midyear growth levels would partially reflect a correction to strong first quarter growth and "volatility and turbulence," especially the price of oil and food and slower global expansion, he said.

The ECB last month moved to cool inflation by hiking borrowing costs for the first time in a year to 4.25 percent.

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.

Trichet made no indication about future rate decisions, maintaining that the bank has no bias up or down but would do whatever it takes to keep inflation under control.

"Looking ahead, based on the current prices for futures commodities, the ... annual inflation rate is likely to remain well above a level consistent" with the bank's goal "for quite some time."

"Mr. Trichet repeatedly stated that the ECB had expected a growth slowdown in the second quarter and that this was in part a correction to the strong growth in the first quarter," said Howard Archer, an economist with Global Insight in London.

"Nevertheless, the ECB also accepted that the recent slowdown 'partly reflects a weakening in GDP growth,'" he said.

Archer said the ECB acknowledged that higher employment across the euro zone helps household disposable income and consumption, but it's unlikely to fully compensate for how higher energy and food prices are whittling away purchasing power.

"We believe that 4.25 percent will mark the peak in Eurozone interest rates although any cut is extremely unlikely to occur until 2009," Archer said.

During the press conference, Trichet also lamented the collapse of talks aimed at reaching a new global trade pact late last month. In his statement he called it "a major setback."

While the trade talks launched in the Qatari capital of Doha in 2001 had struggled before, last month's failure was perhaps the most devastating. Negotiators hoped that a deal to open farm and industrial markets would help alleviate rising food prices, tight credit and slowing economic growth.

Turning back to the euro zone — a bloc of 320 million people that accounts for more than 15 percent of the world's gross domestic product — Trichet said the bank would continue to "monitor very closely all developments" in the coming months, signaling there may not be a rate increase soon.

Higher interest rates can ward off inflation because demand for goods and services can hold steady or fall as a result of money becoming more expensive. Higher rates can also quell growth as expensive money makes it harder for businesses to borrow and expand.

Higher interest rates can also underpin a currency, as investors park capital in investments that earn better interest.

The news kept the euro lower against the dollar Thursday afternoon, steadying at $1.5373 from the $1.5420 in New York late Wednesday, as traders priced out the likelihood of an ECB rate increase anytime soon.

The decisions by both banks confirmed expectations by economists that hamstrung policymakers in Britain and the euro zone have decided that for now the best of their limited options is to do nothing.

"It should not have come as surprise to anyone that, on balance, the (Bank of England) felt it could do nothing but sit tight this month, a situation that is likely to prevail for a few more months," said Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club.

The story is similar in the U.S., too.

On Tuesday, the Federal Reserve left the benchmark rate in the U.S. unchanged at 2 percent, citing its own concerns about inflation and growth.

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AP Business Writer Jane Wardell reported from London.

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On the Net:

http://www.bankofengland.co.uk

http://www.ecb.int

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