The Bank of England cut interest rates yesterday for the first time in more than two years in response to a bout of slow growth in Britain, while the European Central Bank -- long under intense pressure to do the same -- left rates on hold with signs of strengthening in the euro-zone economy.
The British bank cut its key rate to 4.5 percent from 4.75 percent, as widely expected, a move that partially reverses a series of five rate increases that began in late 2003 to rein in buoyant growth and inflation. The ECB, meanwhile, held its key rate at 2 percent, a historic low, for the 26th consecutive month as it waits for the languishing recovery to firm.
A weaker British economy in the first half, as well as a slowdown in household spending and business investment, prompted the Bank of England's Monetary Policy Committee to cut interest rates.
Despite signs of an improvement in consumer spending, "downside risks remain in the near term," the bank said in a statement.
The bank noted that the economy could get a boost from rising equity prices and a fall in the British pound's exchange rate that could help export sales, damping speculation that it would continue to follow through swiftly with a series of deep cuts.
The move is "unlikely to herald the beginning of the new easing cycle," said Gareth Isaac, a fund manager at AXA Investment Managers. "Over the coming months, we expect that the committee will be vigilant and react to further weakness in domestic demand. But interest rates are likely to remain on hold, especially as the global economy appears to be accelerating once again."
The ECB, which sets interest rates for the 12 nations that use the euro, also has been under intense pressure to cut rates. The bank has been reluctant to lower borrowing costs because inflation has remained above the bank's target of slightly less than 2 percent.
With inflation at 2.2 percent, the bank is particularly concerned about the inflationary impact of oil, which traded yesterday at more than $61 a barrel and just off its record. The ECB also is worried that low interest rates are creating a housing bubble, with the annual growth of lending for house purchases at 10.4 percent. In addition, some countries are raising consumer taxes to fill their budget gaps, which could put more upward pressure on inflation.
ECB officials are to some extent feeling vindicated that they have not caved in to pressure for a rate cut because the latest economic data show signs of a rebound. A closely watched survey this month showed that the manufacturing sector expanded for the first time in four months. Business sentiment also has been improving.
Goldman Sachs Group Holdings, which was one of the first investment banks this year to forecast the ECB would cut rates, recently revised its call. Like many banks and economists, Goldman Sachs now thinks the ECB will leave rates on hold for the foreseeable future.