By Mike Caggeso
Associate Editor
The Bank of England's nine-member Monetary Policy Committee cut its benchmark interest rate by a quarter point to 5.25% yesterday (Thursday), in an attempt to fight off the country's slowing consumer spending and precipitously falling housing prices.
"In the United Kingdom, credit conditions for households and businesses are tightening. Consumer spending growth appears to have eased. Although the substantial fall in the sterling exchange rate is likely to promote re-balancing of total demand, output growth has moderated to around its historical average rate and business surveys suggest that further slowing is in prospect," the bank said in a statement. "These developments pose downside risks to the outlook for inflation."
Like the U.S. Federal Reserve, the Bank of England expressed concern of fueling inflation, which at 2.1% in December is slightly above its target of 2%. However, the bank expects inflation to cool later in the year.
"The committee needs to balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term, against the risk that elevated inflation pressures keep inflation above target," the statement said.
The rate cut follows suit with the Bank of Canada, which also cut its rate by a quarter point to 4% after the U.S. Federal Reserve reduced its benchmark rate three-quarters of a point in an emergency session Jan. 21.
The Federal Reserve then cut its benchmark rate another half-point on Jan. 30 to the current rate of 3.25%.
ECB Stays Put, Then Wavers
While interest rates are dropping in England and Canada, the European Central Bank left its benchmark rate at 4% and its President, Jean-Claude Trichet, threatened to raise rates if data showed the U.S. slowdown will affect Europe.
"There was no call for increase of rates or decrease of rates," Trichet told reporters, USA Today reported. "That does not mean that we did not discuss very thoroughly all the elements that are making up the situation."
Hours later, he backpedaled.
"Uncertainty about the prospects for economic growth is unusually high," Trichet said later, Bloomberg reported.
The ECB's situation is a little more complex than that of the United Kingdom because it's making decisions for each of the 15 economies tied together by the euro.
The developing economies in Eastern Europe have seen their inflation climb last year. Meanwhile, Western European stalwarts such as Germany and France have seen their largest banks -Deutsche Bank AG (DB) and Societe General (SCGLY) - take on massive write-downs from subprime-stained assets.
News and Related Story Links:
- Bank of England:
Bank of England Reduces Bank Rate by 0.25 Percentage Points to 5.25%