Tags: BOE

BOE Cuts Rate, ECB Holds Steady

By , Money Morning •

By Jennifer Yousfi
Managing Editor

The Bank of England (BOE) cut its interest rate 25 basis points to 5.0% yesterday (Thursday) while the European Central Bank (ECB) held its rate steady at 4.0%.

The move by the BOE’s Monetary Policy Committee (MPC) was the third quarter point rate reduction since December as the United Kingdom faces many of the same problems currently plaguing the U.S. economy including a housing slump.

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U.K. inflation is currently at 2.5%, above the BOE’s desired 2% target rate, but the central bank feels the current risks to economic growth outweigh inflationary concerns.

"Credit conditions have tightened and the availability of credit appears to be worsening," the MPC said in its policy statement.

The statement did not foreshadow another rate cut when the MPC next meets in May.

"With today's move arguably only providing a partial offset to the recent tightening of credit conditions, RBC Capital Markets suspects that the pressure is on for a follow up cut in somewhat short order and, indeed, sees some significant risk of a further 25-basis-point reduction in May, " Richard McGuire, economist and fixed-income strategist at RBC Capital Markets, told MarketWatch.

Meanwhile, the ECB, led by President Jean- Claude Trichet elected to maintain its current interest rate due to inflation pressures.

"We are experiencing a rather protracted period of temporarily high annual rates of inflation," Bloomberg News reported Trichet said at a press conference in Frankfurt yesterday after the ECB vote. While financial-market tension may have "a broader than currently expected impact on the real economy," ensuring price stability is "very serious for us," he said.

European inflation is currently at a 16-year high. And while Europe’s growth is expected to slow, the IMF forecast it would expand at a 1.2% rate, twice the 0.6% that is expected for the United States.

The U.S. Federal Reserve has cut its rate by 3% to 2.25% since September.

"The world is caught between ice and fire - slower growth and inflation," Dominique Strauss-Kahn, managing director of the IMF, said yesterday. "Inflation is back."

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