FRANKFURT, Germany – The European Central Bank and the Bank of England each kept their benchmark interest rates unchanged Thursday in the face of mounting inflation fears and slowing economic growth across Europe.
The decisions to leave key rates at 4.25 percent in the 15 European nations that use the euro and 5 percent in Britain were largely expected but reporters were looking for any hints about the course of the ECB's rate policy when bank president Jean-Claude Trichet speaks to them later.
The ECB's rate is at a seven-year high while the Bank of England has left its rate unchanged at 5 percent since April when it lowered the figure by a quarter of a percentage point.
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 euro-zone.
“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 the European Union's statistics agenct Eurostat said Wednesday that falling exports and lower household spending caused the euro zone economy – a bloc of 320 million people that accounts for more than 15 percent of the world's gross domestic product – to shrink by 0.2 percent in the second quarter.
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 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, more than double the target, due in part to imported high energy and food prices, the Bank of England had ruled out further rate cuts to follow the two trims it made earlier in the year for fear of spurring inflation yet higher.
On Thursday, Sweden's central bank raised its key interest rate by a quarter of a percentage point to 4.75 percent and said the rate was expected to remain at that level through 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.
AP Business Writer Jane Wardell contributed to this report from London.
