UK and European Central Banks Keep Interest Rates Steady

The Bank of England and the European Central Bank decided yesterday to keep interest rates steady. In the UK, despite evidence earlier that another rate hike might be warranted, the rate is 5.75%. In the eurozone, the rate is 4%. The consensus among those who watch this sort of thing is for cuts in the coming months. The debate is about when rather than if.

The Bank of England’s Monetary Policy Committee [MPC] had been worried back in August about keeping inflation at the government’s target rate of 2%. Talk was of a sixth rate hike this autumn. However, the credit crunch and the Northern Rock mess have taken care of most of that. House price inflation slipped by 0.6% in September, and the money markets themselves have made it harder to borrow. If Prime Minister Gordon Brown decides to hold a snap election on November 8 (when the MPC meets next), there won’t be a rate cut this year, but if he holds off, rates could fall to 5.5% then.

Across the Channel, inflation continues to weigh on the European Central Bank’s mind, but not as much as it did this summer. Jean-Claude Trichet, ECB president, stated, “On balance, risks to the outlook for growth are judged to lie on the downside. These downside risks relate mainly to the potential for a broader impact from the ongoing reappraisal of risk in financial markets on confidence and financing conditions, concerns about protectionist pressures and possible disorderly developments owing to global imbalances, as well as further oil and commodity price rises.” And it’s more complicated in French or German.

The upshot is that the ECB is looking at inflation for the year of 2.1% in the eurozone, which is a couple tenths of a percent higher than the authorities want. However, the euro is at very high levels against the dollar, and the US Fed is cutting rates which will only increase the upside pressure. A rising currency will do much of the work an interest rate hike would do. Some of the latest economic data suggest a slowing in Europe.

Neither bank is required to worry about anything other than inflation, but it is clear that they take a very broad view of how to control inflation. With the BoE set for a rate cut next month (election notwithstanding), it is certain that the ECB is done tightening rates for the foreseeable future. If Europe gets a snap of cold weather with fuel prices where they are, the pressure to cut in January in the eurozone could prove irresistible.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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