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.
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