THE EUROPEAN Central Bank and the Bank of England left interest rates unchanged yesterday as signs of slowing economic growth left them no room for a tougher stance on rising inflation.
ECB president Jean-Claude Trichet spoke of a “materialisation of risks” to economic growth in the eurozone since the governing council last met in early July. That signalled to economists that a rate rise had dropped off the agenda. But there was scepticism about a potentially growth-boosting rate cut soon as Mr Trichet emphasised that the ECB had “one needle on compass” – price stability – and “not two needles” – prices and growth – like the US Federal Reserve.
The ECB’s policymaking committee seemed “alarmed by signs of economic downturn”, said Julian Callow, an economist at Barclays Capital. “Which is why it seems unlikely to raise the policy rate in the months ahead.”
The Central Bank raised its main lending rate by one quarter point to a seven-year high of 4.25 per cent a month ago after record oil and food prices pushed European inflation to 4 per cent in June. Price rises even reached 4.1 per cent in July.
The Bank of England, which will publish minutes of its meeting late in August, kept its main rate at 5 per cent for the fourth month even as price rises accelerated. Inflation reached 3.8 per cent in June and economists believe it rose to 4 per cent last month.
But even as inflation rates have continued to pick up, economic indicators showed growth across Europe could slow more sharply than expected as the global economy cooled in the wake of financial market turmoil. “The magnitude and breadth of the shift downward in the data, not only in the UK, but also in the eurozone, is becoming alarming,” said Malcolm Barr, economist at JPMorgan. Some economists think both economies might already be shrinking.
In his introductory statement after the governing council’s meeting in Frankfurt, Mr Trichet admitted signs of slowing growth in mid-2008 had been only “in part ... expected after the exceptionally strong growth in the first quarter”.
Eurozone gross domestic product increased by a stellar 0.7 per cent in January, February and March, and the ECB had long expected growth to weaken in the succeeding quarters before picking up again in the last three months of 2008.
But Mr Trichet yesterday declined to say whether the central bank still saw an upturn in growth towards the year’s end. He emphasised instead that a full picture of the ECB’s forecasts would come with publication of its latest “staff projection” next month.
Maccario Aurelio, an economist at Unicredit in Milan, said he expected a “sizeable downward revision ... of growth for 2009”, a revision that could bring recent relative optimism of the ECB in line with other forecasters.
