MercoPress. South Atlantic News Agency

Euro and UK keep rates on hold; stern bankers' message

The European Central Bank and Bank of England, despite growing unease about inflation and slowing economic indicators, on Thursday kept their benchmark interest rates unchanged at 4% and 5.5% respectively.

But ECB president Jean-Claude Trichet told a news conference that the European bank is ready to act "pre-emptively" to counter inflation in the 15-country Euro zone which accounts for more than 15% of the world's gross domestic product. Trichet, speaking to reporters after the bank decided to keep its benchmark refinancing rate unchanged at 4%, said the ECB "remains prepared to act preemptively so that second-round and upside risks to price stability" do not materialize and, "consequently, medium and long-term inflation expectations remain firmly anchored in line with price stability". "We are in a position of total alertness and we say very, very clearly to all decision makers in all countries in all the Euro area - and that makes a lot of decision makers - in the public and in the private sector ... we call upon you not to let the spiraling of this headline inflation which comes out from oil, commodities" continue, Trichet said. "We are experiencing a protracted period of high inflation, because of a number of factors which are not under our own control and, amongst those factors I would mention not only oil, commodity and food prices, but also a number of decisions that have been taken by the governments, and also by the parliaments, in a number of countries. But decision makers know and everybody knows that we are here to guarantee price stability in the medium term", insisted Trichet. Earlier, the Bank of England held its key rate steady at 5.5%, resisting a growing chorus for a cut amid mounting signs of a consumer-led economic slowdown. Most analysts expected the ECB would hold rates steady, but said the Bank of England faced a closer call. ECB benchmark refinancing rate has stood at 4% since last June. With people paying more for energy and food, the ECB faces inflation estimated at 3.1% - well above its guideline of just below 2% - but also must contend with sliding business and consumer confidence amid jittery markets. The ECB considers fighting inflation its main mission, but also is mindful of the broader economic context - in which its fellow central banks have been cutting rates, and European businesses and politicians have fretted about the impact of competitiveness of the Euro strength against the U.S. dollar. The bank has pumped billions of Euros into the system to keep banks calm. The U.S. Federal Reserve has cut its key three times over recent months to 4.25%. The Bank of England weighed data showing poor retail sales and falling house prices against the threat of higher inflation from soaring oil prices and rising food costs. The decision to keep rates on hold also gives the bank more time to assess the impact of last month's quarter of a per cent point cut - the first in more than two years - from a six-year high of 5.75%. The BoE has been under growing pressure from retail and business leaders to take rates lower to prevent a consumer-led slowdown in the economy and most economists now expect a cut next month, when policymakers will have more detail on both growth and inflation forecasts. The global credit crisis that dried up money markets in the late summer has rattled consumers in Britain, where homeowners were already feeling the effects of a series of interest rate hikes last year. There has been clear evidence of a slowdown in both the housing market, following a 10% price boom, and in retail spending. Prime Minister Gordon Brown appeared to support the case for an easing by the independent central bank, saying at his monthly news conference on Monday that Britain's low inflation rate had given the bank "flexibility" to make its decisions. However, inflation remains a concern for the Bank of England, which is tasked with maintaining the government's target of 2% or less. It is currently running at 2.1%, and fears remain about the effects of high oil prices and rising food and energy cost. Meantime the pound fell to an all-time low against the Euro after weak manufacturing data underscored a gloomy outlook for the UK economy. Sterling is now at its weakest since the single currency was introduced in 1999, it now takes 75.86 pence to buy a Euro. One pound was worth 1.3243 euros. The pound also hit a 10-month low versus the US dollar at 1.9485. After a strong 2007, the pound is expected to weaken in 2008 as interest rates fall and the UK economy slows. The pound hit a 26-year high against the dollar last year, above 2 US dollars. A weaker pound would make UK exports more competitive on world markets but it could also make imported goods more expensive and raise costs for Britons traveling abroad.