ECB and BoE keep Rates Unchanged

123jump.com Staff
06 Mar, 2008
New York City

The European Central Bank and the Bank of England left their key rates unchaged as both central banks fight rising inflation in the region. The ECB left rates at 4% and the BoE left its rates at 5.25%, highest among the G7 nations. Pound and euro rallied against the dollar after the rate decision. Euro has increased nearly 20% against dollar in the last fourteen months and continues to reach new highs on rate disparities.

[R]10:00AM New York – The ECB and BoE left rates unchanged as the banks fight rising inflation in the region.[/R]

The European Central Bank and The Bank of England left the rates unchanged this morning. The central bank left its target rate at 4% and said that keeping inflation under control is the bank’s highest priority. The unanimous decision of 21-member Governing Council also raised its expectation of 2008 inflation to 2.9% from 2.5%.

Euro are has witnessed slowing economic growth as food and energy prices have surged, euro has jumped 17% against dollar, and German public sector employees are demanding 8% hike in wages. Recent data also suggested the consumer price inflation in the euro zone is at 3.2%, above the target rate of 2% by the bank.

The ECB noted in the accompanying statement that, “With regard to price developments, according to Eurostat’s flash estimate, the annual HICP inflation rate was 3.2% in February 2008, unchanged from January. This confirms the strong upward pressure on inflation in the short term, stemming mainly from the increases in energy and food prices in recent months.

Looking ahead, we expect a more protracted period of relatively high rates of inflation than we did a few months ago. The annual HICP inflation rate will most likely remain significantly above 2% in the coming months and moderate only gradually later in the year.”

The ECB lowered its projection for 2008 economic growth to 1.7% and 1.8% in 2009 from its previous forecast of 2% and 2.1% rates respectively.

After the rate decision euro reached record high against dollar 1.5356.

The Bank of England left its key rate unchanged at 5.25% after the recent data on inflation showed strong pressures on food and energy prices. Recent surveys from several private groups suggested that retailers have passed most of the price hikes to the consumers and home prices are at elevated levels. Consumer price inflation has been on the rise and recent retail sales suggest a moderation in growth rate.

Since the last meeting on February 7th, when the rate was lowered by 0.25%, GDP estimates in the UK has been revised lower and retail sales data suggest a moderation in growth. Home prices though at elevated levels, edged slightly lower as consumer confidence is falling. A survey of retailers indicated that most retailers have passed on price increases to consumers and expected the sales to decline in the months ahead.

GDP in the fourth quarter rose at 0.6% lower rate than 0.7% in the third quarter and the economy is expected to slowdown further in the first quarter of 2008. Annualized inflation in January rose at 2.2%, up from 2.1% in December. RPI in the month increased at 4.1% up from 4% in December.

The Bank of England has a tricky job to balance growth, stabilize the financial markets, and moderate inflation below its target rate.

Pound after the rate decision rallied against dollar to 2.0071.