July 15, 2024

Bank of England Holds Interest Rates Steady

FRANKFURT — The European Central Bank left its benchmark interest rate unchanged Thursday, but was expected to signal that markets should expect a move next month — despite the euro area’s uneven economic recovery.

The Bank of England, meanwhile, kept its main interest rate at a record low amid concerns that the country’s economy is still too weak to cope with higher borrowing costs. It did not issue a statement.

Jean-Claude Trichet, the E.C.B. president, was to hold his regular news conference at 2:30 p.m. Frankfurt time.

Analysts and economists predicted he would say that the bank is “strongly vigilant” toward inflation. That language would indicate a rate increase in July is probable, though the bank always leaves its options open.

On Thursday, the E.C.B. left its rate at 1.25 percent, after raising it in April from 1 percent, the first increase in two years. The benchmark rate in Britain was left at 0.5 percent and the central bank also kept the size of its asset purchase plan unchanged at £200 billion, or about $328 billion.

With Germany, the euro-zone’s largest economy, growing so quickly that some economists fear overheating, the E.C.B. has been trying to nudge interest rates back to levels that would be normal in an upturn.

But the bank faces a policymaking dilemma because the Greek debt crisis still threatens growth in the 17-member euro area as a whole. Economies in Spain, Ireland and other so-called peripheral countries remain sluggish. Higher rates could make it that much harder for those countries to recover.

The economy also remains fragile in Britain. Consumer confidence took a hit in April as more people claimed unemployment benefits and real wage increases lag inflation, weighing on living standards. Spending cuts and tax increases that are part of the government’s austerity program made households even more reluctant to spend.

“The story of weak growth is still going to continue for a while,” James Knightley, a senior economist at ING Financial Markets in London, said.

Some economists had predicted rates would rise in May this year, but as the economic outlook deteriorated have pushed that back to next February. Mr. Knightley expects an increase as early as November this year.

The British economy stagnated in the six months until the end of March. The Bank of England governor Mervyn King has warned that inflation could accelerate to about 5 percent in the short term before falling again. Higher consumer prices, partly a result of higher commodity prices, have started to dampen household spending as companies remain reluctant to hire and banks continue to hold back on lending.

Paul Fisher, a Bank of England official, argued last week that raising interest rates should be delayed until the economy was stronger. The International Monetary Fund on Monday backed Prime Minister David Cameron’s plan to cut the budget deficit, which had been criticized by the opposition Labor Party as too strict and harming the economic recovery.

Julia Werdigier reported from London.

Article source: http://www.nytimes.com/2011/06/10/business/global/10rates.html?partner=rss&emc=rss

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