MercoPress. South Atlantic News Agency

Bank of England cuts rate and ECB remains unchanged

The Bank of England cut interest rates on Thursday for the first time in two years, to 4.5% from 4.75%, while the European Central Bank kept its key rate at 2%.

Both decisions were widely expected, although the ECB was under growing pressure from the Euro zone main partners, Germany, France and Italy, which are underperforming, together with low productivity and high unemployment.

The Eurozone is forecast to expand 1,3% this year down from 1,7% in 2004 and from the original estimate of 1,6%. Estimates for 2006 have also been reduced from 2,3% to 1,9%.

Actually earlier this week the International Monetary Fund said the ECB had been right to keep interest rates at 2% rather than cut them to boost weak economies.

Government officials in Germany and Italy have been urging the ECB to bring rates down as their economies struggle to make headway from virtually zero growth.

But the IMF also indicated that a rate cut might be "appropriate" in future if evidence of a weak recovery mounts. Consumer and business confidence in the Eurozone remains low with high oil prices threatening inflation.

Actually the service and manufacturing sectors strengthened in July giving the impression that business confidence and industrial production are recovering from a second quarter soft patch, which took some of the pressure on the ECB to cut rates.

In England the cut rate was praised as the right decision given a slower growth of the economy and consumer spending.

"This cut will be a catalyst for growth and will provide an essential boost to consumer and business confidence", said Digby Jones head of the Confederation of British Industry.

However the Bank of England in a statement said that "downside risks remain in the near term. Looking further ahead, however, the rise in equity prices and the recent fall in the exchange rate should boost activity".

The U.K. economy grew at the slowest annual pace in 12 years in the second quarter as record oil prices, the end of a property boom and rising unemployment sapped consumer spending.

But UK borrowing costs are still the highest among the Group of Seven richest nations after the central bank raised the repurchase rate five times between November 2003 and August 2004.

The U.K. economy may expand 2% this year, the National Institute of Economic and Social Research, which advises the Bank of England and the Treasury, said July 29. That compares with 3.2% last year and the 3 to 3.5% predicted for 2005 by Chancellor of the Exchequer Gordon Brown.

The Bank of England has said that UK output growth was ''subdued'' in the first half of the year, ''household spending and business investment growth have slowed''.

Next week all eyes will be set in Washington where the Federal reserve Open Market Committee will be meeting and most experts anticipate another 25 basis points increase in the current 3,25% reference rate.