Bank of England cuts key rate
FRANKFURT, Germany (AP) - April 10, 2008 Both central banks acted as analysts predicted in response to
their own, somewhat different challenges: record inflation for the
ECB, growth worries for the Bank of England.
The ECB's decision was made after inflation among the 15
countries that use the euro rose to 3.5 percent, well above the
roughly 2 percent level of comfort the ECB aspires to.
The Bank of England cut its rates by a quarter percentage point
in the face of pressures both from rising inflation and fears about
growth, fueled by sagging house prices and falling consumer
confidence.
The bank's key rate hit its recent peak of 5.75 percent in July
and stayed there until December. The last time the rate was as low
as 5 percent was November 2006.
Several analysts were disappointed the bank didn't cut more.
"The growing downside risks to growth stemming from markedly
tighter credit conditions and elevated market interest rates meant
that there was a compelling case for the Bank of England to cut
interest rates further," said Howard Archer, chief European
economist at Global Insight.
The ECB has a mandate to keep inflation in check. In the
Frankfurt-based bank's view, concerns about the credit squeeze are
no match for inflation running at 3.5 percent and recent wage deals
in Germany - the largest economy in the 15-nation euro area - that
could send it even higher.
The ECB's rate has been unchanged since last June. Back then,
the ECB - which sets monetary policy for the bloc of 317 million
people that accounts for some 15 percent of the world's global
domestic product - appeared likely to keep raising rates amid
steady growth.
ECB President Jean-Claude Trichet underscored his bank's tough
stance on interest rates last week, saying that "price stability
is something which is essential for the poorest and the most
vulnerable of our citizens."
Since the wave of subprime defaults began and led to a credit
crisis in August, central banks in the U.S., Britain and elsewhere
have been steadily cutting rates in an effort to encourage banks to
lend and promote more economic activity.
Central banks usually raise rates to increase the cost of
borrowing and cool inflation in an overheating economy - something
that is difficult to do now as banks tighten loan conditions,
making it harder for businesses to get credit and home buyers to
secure mortgages.
Amid concern over the fallout from a weakening U.S. economy and
the euro's strength against the dollar, economists will be looking
to Trichet's post-decision news conference for hints as to how long
the ECB will maintain its no-cut stance.
The euro reached a new all-time high of $1.5912 shortly before
Thursday's ECB decision, breaking through its previous record of
$1.5904, set March 17.