ECB, BoE hold interest rates steady By MATT MOORE, AP Business Writer

ECB, BoE hold interest rates steady By MATT MOORE, AP Business Writer
1 hour, 26 minutes ago



FRANKFURT, Germany - The European Central Bank held its benchmark rate steady at 4 percent on Thursday, as inflation in the 13 nations that use the euro remains below the ECB's warning level. Earlier Thursday, The Bank of England left its key rate unchanged at 5.75 percent following last month's quarter-point increase.

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Some analysts had said market volatility because of concern that an expanding subprime loan crunch in the U.S. may have effects in Europe could lead the bank to act cautiously.

ECB President Jean-Claude Trichet, who oversees policy for the euro zone of 318 million residents that accounts for more than 15 percent of the world's gross domestic product, scheduled an unexpected news conference to discuss the decision.

Global stock markets have zig-zagged on persistent worries that a deteriorating lending environment will make it harder for companies to borrow money. Subprime loans are those made to borrowers with shaky credit histories.

Trichet told German newspaper Die Zeit last week that the major market moves had been nothing more than a "healthy correction."

He added, however: "I remain cautious: It is no time for complacency."

Howard Archer, the chief U.K. and European economist for Global Insight in London, said the bank and Trichet have been "broadly upbeat about current euro-zone economic activity and growth prospects."

He had forecast that the ECB would keep its refinancing rate unchanged but expected it to set the stage for an increase to 4.25 percent in September.

The "current financial market turmoil will not deter the ECB from acting in September," Archer said — although "if it deepens, it would increase the possibility that the ECB could hold fire until October."

Forty-five economists surveyed by Dow Jones Newswires had been unanimous that the rate would remain unchanged this week.

The bank's governing council conducts its August meeting by telephone — limiting the scope for detailed discussion of any rate shift. The ECB had not initially planned a news conference but reversed course on Thursday.

Archer said he expected to the bank to say "strong vigilance" is required, a phrase that Trichet has used a month before each of the eight increases since the bank started raising rates in December 2005.

Thirty-nine of the 45 economists polled by Dow Jones said they expect to see the benchmark rate at 4.25 percent by the end of the third quarter.

Inflation in the euro zone has been within the ECB's guidelines of just under 2 percent, easing to just 1.8 percent last month from June's 1.9 percent. Unemployment in both the 27-nation European Union and the euro area held steady in June at a record low of 6.9 percent.

Although European business confidence has weakened from a near-record high, the euro remains within 2 cents of its recent all-time high of US$1.3852. The weaker dollar makes U.S. exports more competitive, as the strong euro can squeeze European exporters.

A narrowing interest rate gap between the United States and Europe has steadily undermined the dollar. The U.S. Federal Reserve has left its benchmark rate unchanged at 5.25 percent for a year after two years of steady increases.