Bank of England rate decision comes amid calls
European central banks make key interest rate decisions with the Bank of England facing calls for a second successive cut to boost fragile consumer confidence while the European Central Bank is expected to stand firm.
By Agencies |
LONDON: European central banks make key interest rate decisions on Thursday, with the Bank of England facing calls for a second successive cut to boost fragile consumer confidence while the European Central Bank is expected to stand firm.
Economists say the ECB has rates on hold because it is torn between the threat of rising inflation and uncertainty about fallout from the US subprime credit crisis.
Financial markets will focus on remarks from ECB President Jean-Claude Trichet, and on what is expected to be a close decision from the British central bank.
Many economists expect the Bank of England to reduce rates further after it cut borrowing costs last month for the first time in more than two years, to 5.5 percent from 5.75 percent. But there is uncertainty about whether the bank will do so Thursday or hold off for another month to collect more data.
There is mounting evidence that the economy is slowing _ retailers reported their worst Christmas since 2004 and most housing surveys indicate that prices are falling _ and the bank is also facing the threat of higher inflation from soaring oil prices and rising food costs.
Rate cuts can boost growth but if done at the wrong time can worsen inflation too.
``If forced to come down on one side of the fence, we would marginally favor the view that the MPC will delay until February given ongoing inflation risks,'' said Global Insight chief economist Howard Archer, referring to the bank's nine-person Monetary Policy Committee.
However, he added that he ``certainly would not be shocked if the MPC did cut rates on Thursday as there is a genuine case for further pre-emptive action to try to minimize the risk of a sharp economic slowdown over the coming months.''
Retailers have led calls for the bank to ease pressure on consumers who have been rattled by the global credit squeeze. European retail stocks tumbled on Wednesday after industry bellwether Marks & Spencer PLC reported poor sales over the key Christmas period.
Prime Minister Gordon Brown appeared to support the case for an easing by the independent central bank, saying at his monthly news conference on Monday that Britain's low inflation rate had given the bank ``flexibility'' to make its decisions.
However, JP Morgan economist Malcolm Barr said that a ``second rate cut from the MPC tomorrow requires them to express significantly more confidence in the anchoring of inflation expectations and the credibility of the monetary policy making process in the face of cost-shocks.''
Inflation is currently running at 2.1 percent, slightly above the government's target of 2 percent or less.
Meanwhile, the European Central Bank's benchmark refinancing rate has stood at 4 percent since last June, and 50 analysts surveyed by Dow Jones Newswires were unanimous in predicting no change Thursday.
With people paying more for energy and food, the ECB faces inflation estimated at 3.1 percent _ well above its guideline of just under 2 percent _ but also must contend with sliding business and consumer confidence amid jittery markets.
At the ECB's December meeting, bank President Jean-Claude Trichet conceded that there had been talk of raising interest rates before governing council members decided by consensus to leave them unchanged.
The ECB considers fighting inflation its main mission, but also is mindful of the broader economic context _ in which its fellow central banks have been cutting rates, and European businesses and politicians have fretted about the impact of competitiveness of the euro's strength against the US dollar. The bank has pumped billions of euros into the system to keep banks calm.
``With oil flirting with the $100 per barrel totem, and at least one more rate cut by the Fed in the pipeline, it would be very dangerous to embark on a second stage of the tightening campaign it commenced two years ago,'' said Aurelio Maccario, co-head of European economics at UniCredit Markets & Investment Banking in Milan, Italy.
In that campaign, the bank increased interest rates eight times, taking them from 2.5 percent to 4 percent.
The US Federal Reserve has cut its key three times over recent months to 4.25 percent.
Matt Moore reported from Frankfurt, Germany.
Economists say the ECB has rates on hold because it is torn between the threat of rising inflation and uncertainty about fallout from the US subprime credit crisis.
Financial markets will focus on remarks from ECB President Jean-Claude Trichet, and on what is expected to be a close decision from the British central bank.
Many economists expect the Bank of England to reduce rates further after it cut borrowing costs last month for the first time in more than two years, to 5.5 percent from 5.75 percent. But there is uncertainty about whether the bank will do so Thursday or hold off for another month to collect more data.
There is mounting evidence that the economy is slowing _ retailers reported their worst Christmas since 2004 and most housing surveys indicate that prices are falling _ and the bank is also facing the threat of higher inflation from soaring oil prices and rising food costs.
Rate cuts can boost growth but if done at the wrong time can worsen inflation too.
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``If forced to come down on one side of the fence, we would marginally favor the view that the MPC will delay until February given ongoing inflation risks,'' said Global Insight chief economist Howard Archer, referring to the bank's nine-person Monetary Policy Committee.
However, he added that he ``certainly would not be shocked if the MPC did cut rates on Thursday as there is a genuine case for further pre-emptive action to try to minimize the risk of a sharp economic slowdown over the coming months.''
Retailers have led calls for the bank to ease pressure on consumers who have been rattled by the global credit squeeze. European retail stocks tumbled on Wednesday after industry bellwether Marks & Spencer PLC reported poor sales over the key Christmas period.
Prime Minister Gordon Brown appeared to support the case for an easing by the independent central bank, saying at his monthly news conference on Monday that Britain's low inflation rate had given the bank ``flexibility'' to make its decisions.
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However, JP Morgan economist Malcolm Barr said that a ``second rate cut from the MPC tomorrow requires them to express significantly more confidence in the anchoring of inflation expectations and the credibility of the monetary policy making process in the face of cost-shocks.''
Inflation is currently running at 2.1 percent, slightly above the government's target of 2 percent or less.
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Meanwhile, the European Central Bank's benchmark refinancing rate has stood at 4 percent since last June, and 50 analysts surveyed by Dow Jones Newswires were unanimous in predicting no change Thursday.
With people paying more for energy and food, the ECB faces inflation estimated at 3.1 percent _ well above its guideline of just under 2 percent _ but also must contend with sliding business and consumer confidence amid jittery markets.
At the ECB's December meeting, bank President Jean-Claude Trichet conceded that there had been talk of raising interest rates before governing council members decided by consensus to leave them unchanged.
The ECB considers fighting inflation its main mission, but also is mindful of the broader economic context _ in which its fellow central banks have been cutting rates, and European businesses and politicians have fretted about the impact of competitiveness of the euro's strength against the US dollar. The bank has pumped billions of euros into the system to keep banks calm.
``With oil flirting with the $100 per barrel totem, and at least one more rate cut by the Fed in the pipeline, it would be very dangerous to embark on a second stage of the tightening campaign it commenced two years ago,'' said Aurelio Maccario, co-head of European economics at UniCredit Markets & Investment Banking in Milan, Italy.
In that campaign, the bank increased interest rates eight times, taking them from 2.5 percent to 4 percent.
The US Federal Reserve has cut its key three times over recent months to 4.25 percent.
Matt Moore reported from Frankfurt, Germany.
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