Britain Cuts Interest Rate Because of Inflation; ECB Keeps Rate Constant
The European Central Bank, caught between fears of rising inflation and subsiding economic growth, walked a middle ground on Thursday, leaving interest rates unchanged.
But across the channel, the Bank of England opted to take action, cutting its key rate for the first time in two years, by a quarter-point, to 5.5 percent. The bank said the credit squeeze in the United States had curtailed loans for households and businesses, denting Britain’s growth prospects.
The different decisions underscore the murky atmosphere as Europe grapples with the fallout from the American mortgage crisis as well as rising prices for oil, food, and other necessities.
“These are not normal times,” said Thomas Mayer, chief European economist at Deutsche Bank in London. “The global economy has taken a shock, and you have to decide, ‘Does it matter or does it not matter?’ ”
The European Central Bank, in deciding to leave its benchmark rate at 4 percent, signaled it was more troubled, for the moment, by rising prices. Inflation rose to 3 percent in November — a full percentage point above the threshold preferred by the central bank’s monetary policy.
The bank predicts inflation will stay above 2 percent for most of 2008 and warns that it could be amplified by so-called second-round effects, like demands by unions for hefty wage increases.
“We will not tolerate second-round effects,” the bank’s president, Jean-Claude Trichet, said at a news conference in Frankfurt, implying that the bank would raise rates if it saw such activity.
In a rare departure from his usual discretion about the bank’s deliberations, Trichet disclosed that some bankers on the 19-member governing council had argued for raising rates.
The bank’s hawkish tone pushed up the euro modestly against the dollar, though the strength of the European currency did not even come up at the news conference, suggesting that, at least temporarily, it has been displaced by worries about the price of bread and milk.
High prices for food and fuel have also nudged inflation in Britain above the 2 percent target set by the Bank of England. But that bank’s monetary policy committee said the threat of inflation was overshadowed by the damping effects of continued turmoil in the credit markets.
In Britain, 1.4 million homeowners are set to refinance their mortgages in the next year or so, Simon Rubinsohn, the chief economist of the Royal Institution of Chartered Surveyors, said in a note. Cutting interest rates will provide them with “some much needed relief,” he wrote.
While the European Central Bank emphasized inflation, it is not discounting the potential effects of the credit tightening on Europe. The bank trimmed its forecast for European growth next year to 2 percent, from 2.3 percent, despite what it characterized as a “resilient” global economy.