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ECB, BOE Leave Rates Steady
added: 2008-09-08

The Australian Reserve Bank cut rates this week because the economy is slowing faster than it thought and the cut came despite inflation at 4.5%, the highest level for years.

The European Central bank and the Bank of England maintained their hardlines on rates, despite ample evidence that their respective economies have tanked, and continue to tank. The decisions saw a volatile day's trading on forex markets: the dollar rose to a 2008 high against the euro of $US1.43 (compared to the all time low of just over $US1.60), but the Australian dollar shed 1.5% in value overnight to trade around 82.26 US cents, the lowest level for a year.

Last night the Bank of England kept its key rate unchanged at 5%, despite mounting evidence of a recession, and more signs of the fall in house prices accelerating. Halifax Building Society said UK house prices fell by an average annual rate of 10.9% in August (it's a rolling three month average so the fall was much larger), but the central bank wasn't moved.

That was the fastest rate of fall in UK housing for a quarter of a century, according to Halifax Across the Channel the ECB left its rate unchanged at 4.25%. That's because the ECB believes eurozone inflation will not return to within its target of 2% until 2010. President Jean-Claude Trichet made it clear that a cut in interest rates was far from being on the bank's agenda in spite of the risk of a recession.

The ECB left its main interest rate unchanged at a seven-year high but bumped up its forecast for inflation this year and next on the back of higher oil prices. At the same time, Mr Trichet expressed renewed confidence that a "trough" in growth in the second and third quarters of this year would be followed by "progressive recovery".

Previously the Bank of England had declared that higher inflation was its main concern, despite the weak UK economy. The Bank of England's move to keep rates on hold for the fifth month in a row had been widely expected, with the high inflation rate, which is expected to peak later this year outweighing the increasing evidence of the recession. Some economists claim the slump in manufacturing, services and construction is starting to slow with a bottom perhaps reached in the next few months.

But it looks increasingly like a hard landing as the bank is trapped by an inflexible inflation target of 2%, with the UK version of the consumer price index expected to top out at 5% in the next month or so. Inflation hit an annual rate of 4.4% in July (4.5% in the June quarter here and expected to peak around 5%) and the bank's August policy forecasts showed inflation could accelerate to 5%. The Bank of England has cut rates three times since last December (Remember that our Reserve bank had two rate rises in the bag by then, and then two more by March, before waiting and then cutting this week).

The pound has been falling consistently to an all-time low against the euro and is weakening against the US dollar and economic growth ground to as half in the June quarter. The Organisation for Economic Co-Operation and Development warned this week that the eurozone and UK economies would "barely creep forward" in the second half of this year.

Updated projections by the Paris-based organisation suggested the 15-country eurozone would avoid a technical recession – two quarters of contraction - this year but would grow by just 1.3% against the earlier expected 1.7% annual growth rate. the eurozone contracted slightly in the second quarter.

The forecast for UK growth was cut from 1.8% to 1.2%, although the OECD warned it was not sure it had correctly judged the likely impact of sharp falls in house prices. The OECD also warned that underlying inflation trends meant more "slack" could be needed in the economy to bring price pressures back under control.

In Europe, the downturn in housing markets was spreading beyond countries such as Denmark, Ireland, Spain and the UK, which have seen sharp corrections.

The ECB lowered its 2008 economic growth forecast to about 1.4% from 1.8% and its 2009 prediction to 1.2% from 1.5%. The central bank raised its inflation forecast for this year to 3.5% from 3.4% and 2.6% from 2.4% for 2009.


Source: ABN Newswire

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