Europe’s two leading central banks left interest rates on hold Thursday as they attempt to size up the economic fallout from the credit crunch unleashed by the US housing market crisis.
Meeting in London the Bank of England kept borrowing costs on hold for the third month at 5.75% with the Frankfurt-based European Central Bank’s governing council leaving rates unchanged at four per cent at a regular out-of-town meeting in Vienna. But while some analysts expect the Bank of England to follow the lead of the US Federal Reserve and cut rates in the coming months, the ECB indicated that it had still not abandoned hiking the cost of money in the 13-member eurozone. Speaking at a press conference after the governing council meeting in Vienna, ECB chief Jean-Claude Trichet said the bank had adopted a wait-and-see approach as it assessed the economic implications of the market turmoil triggered by a surge in defaults in risky US mortgages.
Although the Bank of England’s monetary policy committee did not release any statement following its meeting, the bank has previously indicated it was weighing up the broader economic ramifications of the upheaval in the US housing market. Last month the Bank of England was forced to mount a bailout for a key British lender Northern Rock after it was engulfed by the fallout from the US subprime mortgage market. In his comments to reporters Thursday, Trichet warned that inflation risks remained on the upside, adding that there was “heightened uncertainty” which could derail growth in the member eurozone. The Vienna meeting of the ECB’s 19-head rate-setting council comes a month after the bank shelved a proposed increase in borrowing costs. But although ECB chief appeared to back pedal from his previous tough line on monetary policy, he indicated that the rate hike might still have not been abandoned.
Trichet repeatedly told the press conference that the bank “stands ready to counter upside risks” to inflation in the eurozone economy. “Overall, the statement suggests that the (governing) council is still biased towards tightening policy as it sees the same number of upside risks to price stability,” said Niels-Henrik Bjornn, economist with Danske Bank. For the time being, “caution needs to be exercised” Trichet told journalists saying that the ECB needed information to analyze the situation. “It remains necessary to gather additional information and examine new data before drawing further conclusions for monetary policy in the context of our medium-term-oriented monetary policy strategy,” Trichet said.
Since the governing council meeting last month, the euro has climbed to record highs adding to the economic uncertainties facing the eurozone. At the same time, expectations have grown that the US Federal Reserve will cut interest rates again to spur growth in the world’s biggest economy. While Thursday’s decision was in line with analysts’ forecasts, Trichet would not be drawn on market expectations that a change in rates was off the table until early next year. “We are always alert,” he said. “We are never pre-committed.” But adding to the current dilemma facing the ECB governing council members has been a recent batch of data showing a sudden jump in inflation combined with signs the currency bloc was losing economic momentum.
On the other hand, however, Britain faces the risks of higher inflation on the back of a better-than-expected economic growth performance. While the euro’s surge is tightening monetary conditions and helping the ECB to buy time on rates, data released last week showed inflation in the eurozone breaching the bank’s 2% target for the first time in 12 months in September. At the same time, the current strength of the euro also threatens to undercut the currency bloc’s key export machine. (m&c.com)