U.S. News

European Central Bank, Bank of England Keep Rates Steady


The European Central Bank and the Bank of England both kept interest rates steady Thursday, and ECB President Jean-Claude Trichet, said “strong vigilance” against price risks is of the essence, which many market watchers will take as a signal to mean that Euroepean interest rates will rise next month.

The Euro rose against the dollar on Trichet’s statement.

Almost all of the analysts polled by Dow Jones expected the ECB to keep short-term rates at 3.5%, but a rate rise is anticipated next month.

Year-on-year inflation is watched closely as the European Central Bank decides whether to press on with a series of interest-rate increases that would raise the cost of borrowing. Inflation in the euro zone was 1.9% in December for a third straight month, just under the recommended level of 2%.

Lower energy prices have taken some inflationary pressures away, but unions and politicians are starting to talk about the need for higher wages, so the ECB will have to balance those factors, Allan Valentiner, director fixed-income research at Johannes Führ Deutschland GmbH, told "Squawk Box Europe."

"I should expect that the ECB should hike rates in March to 3.75% and again in June," Thorsten Polleit, European economist at Barclays Capital, told "Power Lunch Europe."

Each of the last six times Trichet used the word vigilance, a rate increase was handed down the next month.

No Surprise This Time

The Bank of England kept interest rates on hold at 5.25% as the central bank waited to see if last month's surprise rate rise would be enough to cool inflation.

About 75% of economists polled by Reuters expected the BOE to hold rates at 5.25%.

Inflation is still a major concern in the U.K. This week, data showed British retail sales had their strongest January for three years, Reuters reported. Inflation has been above the BOE's 2% target rate since May. But it appears that last month's surprise rise was a preemptory move rather than a signal of a tightening cycle.

The decision to hold rates was probably the right move, but much depends on what next week's inflation reports says, Philip Shaw, chief economist of Investec, told "Power Lunch Europe."

"The previous rate hike was to show that the (Monetary Policy Committee) is not going to tolerate wage price increases," Shaw said.