ECB stays on hold as Britain raises rate

ECB interest rates were kept on hold yesterday while Britain’s Monetary Policy Committee raised rates another 0.25%.

Europe’s central bankers decided sufficient buoyancy existed, making a further cut from the base 2% rate unnecessary.

Eurozone weakness until recently raised expectations the ECB would introduce one more interest rate cut to kick-start the economy, which in key states such as Germany and France, was virtually stagnant.

The other reason the ECB held off was the hardening of the interest rate outlook in the US where Federal Reserve Chairman Alan Greenspan has more or less pinpointed June for the first hike in rates in a year.

At 1% the key US rate is only half the ECB’s 2% base rate. However the trend in the US is towards definite robust growth this year.

That was confirmed in the recent jobs surge in March when nearly 400,000 jobs were generated. Some forecasters say US rates will double over 12 months.

But scepticism linger as to the realness of the recovery in the world’s largest economy. Fears persists about the 500bn budget and trade deficits. Others fear the recovery is artificially propped up by tax breaks.

After the election the

underlying issues of a jobless recovery and an economy struggling to recover from the biggest post war boom ever could see the US slide back into slow or even negative growth, sceptics warn.

However, the mood in the US and UK is upbeat.

For that reason interest rates were raised by a quarter of a percentage point for the third time since November, to 4.25%, as the Bank of England struggles to keep a lid on inflation.

It fears soaring house prices and consumer spending could destabilise economic growth.

More hikes are on the horizon, even though the central bank noted inflation, now running at just 1.1%, would probably remain below its 2% target in the short-term.

“They’re worried about inflation pressures down the road, so their inflation hackles are up and they’re not going to stop tightening until they’re pretty sure that 2% is not going to be breached,” said David Brown, economist at Bear Stearns.

ECB president Jean- Claude Trichet said the sharp rise in oil and commodity prices posed short-term risks to eurozone inflation.

While economic indicators for the eurozone remain mixed, the most recent data appeared more encouraging, he said.

He added that the ECB was leaning neither to a rate cut nor a hike and was keeping its options open.