Europe Economy

ECB, BOE Leave Rates on Hold to Fight Inflation

The European Central Bank left its main interest rate unchanged at 4 percent as expected, saying that the danger of stubborn inflation in the euro zone was high, while the fundamentals of the economy were still strong.

ECB President Jean-Claude Trichet said in his news conference that inflationary pressures remained.

"The latest information has confirmed the existence of strong upward pressure on inflation," Trichet said. "The economic fundamentals of the euro area are sound."

"The level of uncertainty from the turmoil in the financial markets is high," he added.

The ECB downgraded its outlook for 2009 economic growth for the euro zone to between 1.3 percent and 2.3 percent, versus 1.6 percent to 2.6 percent forecast in December, Trichet said.

For this year, economic growth is projected at between 1.3 percent and 2.1 percent.

New projections put the Harmonised Index of Consumer Inflation for this year between 2.6 percent and 3.2 percent, raising the midpoint to 2.9 percent from 2.5 percent in the last round of forecasts in December. 

For 2009, inflation is forecast in a 1.5-2.7 percent range, or a 2.1 percent midpoint from 1.8 percent earlier.

Euro Hits New Record High

The euro hit another all-time high above $1.53 versus the dollar as Trichet said that fighting inflation was the ECB's only purpose.

"We have one needle in our compass, which is price stability," Trichet said.

Analysts' say the single currency's level is considered painful for the euro zone economy in the long term.

"The euro zone economy … has been supported first and foremost by exporters, then to a degree by housing as well," Horst Löchel, professor of economics from Frankfurt School of Finance & Management, told "Power Lunch Europe."

Trichet reiterated that he noted "with extreme attention" the statements made by U.S. officials that a strong dollar was in the interest of the U.S.

The decision to hold the rates was unanimous, Trichet said, and there was no call for a move in either direction.

BoE on Hold

The Bank of England left its key interest rate unchanged at 5.25 percent on Thursday, as inflation fears prevailed over more evidence that the British economy was cooling down.

The pound rose slightly versus the dollar after the move, while stocks in London did not react, as the decision to hold was widely expected.

"I think the Bank of England decision today was a disappointment, considering the large signs of stress emerging in the sterling money markets," Lena Komileva from Tullett Prebon told "Power Lunch Europe."

Analysts expect the Bank of England to cut rates later this year, once the danger of inflation caused by higher energy and food prices has subsided.

There is a danger that the UK economy will follow the footseps of the U.S. and fall into a recession, some said.

"I think we’re going to have one (recession) in the United States and I think we’re going to have one here," Ian Morely, CEO of Dawnay, Day Brokers Limited, told "Power Lunch Europe."

Two ECB Cuts Expected

Worries over weakening economic growth in the euro zone will overtake inflation concerns in June, Paul Mortimer Lee, global head of market economics from BNP Paribas, told "Worldwide Exchange."

"There’s very weak numbers coming for euro zone GDP (gross domestic product) in coming quarters," Lee said, adding that rising inflation is squeezing consumers’ ability to spend. 

The majority of analysts polled by Reuters see two rate cuts this year, with the first likely in either May or June.

Inflation in the 15-nation euro zone came in at 3.2 percent in January and February, well above the ECB’s stated target of near 2 percent over the medium term. 

Home-grown inflation "is actually pretty moribund", Lee said, and the euro’s strength against the dollar is offsetting some of the effects of energy price rises.