FRANKFURT, Aug 7 (Agencies): The European Central Bank (ECB) and the Bank of England (BoE) both left their benchmark interest rates unchanged Thursday as they ponder how best to steer their economies between the shoals of mounting inflation and slowing growth.
The BoE has left rates unchanged since April, when it reduced its benchmark figure by a quarter of a percentage point. The ECB last month moved to cool inflation by hiking borrowing costs for the first time in a year to 4.25 per cent for the 15 countries that use the euro - a bloc of 320 million people that accounts for more than 15 per cent of the world's gross domestic product.
ECB President Jean-Claude Trichet is expected to explain the bank's decision when he meets with reporters shortly.
Higher interest rates can ward off inflation because demand for goods and services can steady or fall as a result of money becoming more expensive. On the other hand, higher rates can also quell growth as expensive money makes it harder for businesses to borrow money and expand.
Higher interest rates can also underpin a currency, as investors park capital in investments that earn better interest.
The decisions by both banks confirmed expectations by economists that hamstrung policymakers in Britain and the Eurozone have decided that for now the best of their limited options is to do nothing.
"It should not have come as surprise to anyone that, on balance, the (Bank of England) felt it could do nothing but sit tight this month, a situation that is likely to prevail for a few more months," said Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club.
Alexander Koch, an economist at UniCredit said despite a recent correction in the price of oil, he still expected commodity pressures, higher producer prices, and no immediate relief on the inflation front. Furthermore, recent business climate indices in Europe and Germany - the Eurozone's biggest economy - have pointed to similar expectations and slowing growth, he said.
Meanwhile, the International Monetary Fund (IMF) slashed its growth forecasts for the British economy yesterday and pointed to high inflation that argued against a cut in interest rates by the Bank of England (BoE).
For 2008, the IMF expects economic growth to measure 1.4 per cent and in 2009 only 1.1 per cent. In July, it had predicted 1.8 per cent and 1.7 per cent respectively.
IMF Vice Director Ajai Chopra told journalists that with growth "so close to zero, essentially flat growth, it doesn't take very much to push that into negative territory."
A recession is defined as two consecutive quarters of economic contraction.
On Thursday, the BoE is to hold a policy meeting to decide on interest rates with most analysts expecting no change in the cost of borrowing.
The IMF argued that there was little room for easing interest rates despite the boost that such a move would give to economic activity.
British 12-month inflation jumped to a 16-year high point of 3.8 per cent in June, owing to big rises for food and fuel prices, according to official data.
The IMF forecasts for growth differ sharply with those of the British government, which still officially foresees expansion of 2.0 per cent in 2008 and 2.5 per cent in 2009.
