ECB and Bank of England Stands Pat

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ECB, BoE Hold Interest Rates Steady

Thursday August 2, 10:15 am ET
By Matt Moore, AP Business Writer
European Central Bank, Bank of England Hold Interest Rates Steady Amid Jittery Global Markets

FRANKFURT, Germany (AP) -- The European Central Bank held its benchmark rate steady at 4 percent on Thursday, a move that comes amid unsettled global markets and as inflation in the 13 nations that use the euro remains below the ECB's warning level.

Some analysts had said market volatility because of concern that an expanding subprime loan crunch in the U.S. may have knock-on effects in Europe could lead the bank to act cautiously.

ECB President Jean-Claude Trichet said it remains integral for investors and regulators to keep ahold of their "composure" in such times.

"In the present episode we see a reappreciation of risks," he said, saying that could be interpreted as a "process of normalization."

Global stock markets have zig-zagged on persistent worries that a deteriorating lending environment will make it harder for companies to borrow money.

But Trichet -- who oversees monetary policy for the zone of 318 million residents that accounts for more than 15 percent of the world's gross domestic product -- said that such jitters were not hurting the euro-area economy, but should not be ignored.

The ECB and its governing council "think that this evolution in financial markets deserves attention and we will continue to observe" and to give "great attention" to how it unwinds, he said.

Looking ahead, Trichet said that strong vigilance was warranted. Those are words that have presaged the last eight such increases since the bank began raising rates in December 2005.

"I don't ask for any reinterpretation," Trichet said.

The euro was not affected by the decision, trading at around US$1.3665 after the rate verdict was issued, up slightly from US$1.3662 earlier in the day and above the US$1.3656 it bought late Wednesday in New York.

Earlier Thursday, The Bank of England left its key rate unchanged at 5.75 percent following last month's quarter-point increase.

Matthew Sharratt, an economist with Bank of America, said that "forward-looking indicators of the housing market together with current financial markets jitters and the recent flooding in England argue against a near-term rate hike."

Howard Archer, the chief U.K. and European economist for Global Insight in London, said the ECB and Trichet have been upbeat about euro-zone economic activity and growth prospects.

"By Mr. Trichet holding an impromptu media briefing and then announcing that 'strong vigilance' is needed to ensure that risks to medium-term euro-zone price stability do not materialize, the ECB sent a very clear message that interest rates will rise by a further 25 basis points to 4.25 percent in September," he said.

Forty-five economists surveyed by Dow Jones Newswires had been unanimous that the rate would remain unchanged this week. But 39 expected to see the benchmark rate at 4.25 percent by the end of the third quarter.

Inflation in the euro zone has been within the ECB's guidelines of just under 2 percent, easing to just 1.8 percent last month from June's 1.9 percent. Unemployment in both the 27-nation European Union and the euro area held steady in June at a record low of 6.9 percent.

Although European business confidence has weakened from a near-record high, the euro remains within 2 cents of its recent all-time high of US$1.3852. The weaker dollar makes U.S. exports more competitive, as the strong euro can squeeze European exporters.

A narrowing interest rate gap between the United States and Europe has steadily undermined the dollar. The U.S. Federal Reserve has left its benchmark rate unchanged at 5.25 percent for a year after two years of steady increases.

The bank's governing council conducts its August meeting by telephone -- limiting the scope for detailed discussion of any rate shift. The ECB had not initially planned a news conference but reversed course on Thursday. Only Trichet was on hand. Normally he is accompanied by Lucas D. Papademos, the bank's vice president.