Europe resists pressure to cut rates

Bank of England, ECB and Swiss refuse to follow Fed's lead despite pleas to lower cost of borrowing

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Europe's three major central banks yesterday refused to follow the dramatic lead set by the US Federal Reserve and slash interest rates.

The Bank of England, the European Central Bank and the Swiss National Bank all left rates on hold in face of pleas to prevent their economies slipping into recession.

While the decisions were greeted with disappointment, they were not a surprise and fuelled speculation the UK and euro banks had simply delayed an aggressive half-point cut until next month.

The ECB revealed it was split over the decision and it is almost certain the Bank's nine-strong Monetary Policy Committee was divided.

It leaves UK rates at a 38-year low of 4.0 per cent and euro rates at 3.25 per cent compared with a four-decade low of 1.25 per cent in the US. Rates have been on hold for 12 months, the longest period of unchanged policy since 1969.

The Bank issued no statement but will explain its decision next week when its publishes its inflation forecasts.

It is almost certain that it decided the risk of triggering a fresh surge in house prices outweighed the threat posed to UK growth by a weak and worried world economy.

The Bank might have also wanted to wait for a clue to the Government's tax and spending plans from its pre-Budget report later this month.

Concerns about the property market are reinforced today by Land Registry figures showing house prices rose by a record 18 per cent over the summer.

David Frost, the director general of the British Chambers of Commerce, said the decision was "understandable" given the housing market bubble.

"The key to revival in the export-oriented manufacturing sector is a healthy recovery in the economies of our trading partners," he said.

Some economists believe the Bank left rates on hold because of the positive effect the Fed's cut would have on UK exporters – an argument laid out by MPC member Marian Bell last week.

But this did not wash with industry or unions. John Monks, TUC general secretary, said: "This was a disappointing, risky and unnecessary decision."

Dougie Peedle of the Engineering Employers' Federation added: "Companies will find it hard to understand the reluctance to reduce rates when growth is modest, and inflation continues to undershoot what is supposed to be a symmetrical target."

Accountants KPMG said businesses would be even more distressed if the widening gap between US and UK rates pushed up the pound, making exports pricier. On the markets sterling had its biggest one-day gain against the dollar in four months, rising to $1.5798 from $1.5578 on Wednesday. It also rose against the euro.

The decision cemented differences between City economists. Andrew Clare, a financial economist at Legal & General, said: "Under the circumstances it seems utterly incredible there was ever the prospect of a rate cut."

Mark Cliffe at ING Barings said the Bank would act if the outlook worsened. "It could well be forced into a more aggressive half-point move if the data continue to deteriorate as we expect as Middle East tensions escalate," he said.

While the Bank was silent, the ECB's president, Wim Duisenberg, baffled analysts by saying he shared the Fed's economic assessment. "The uncertainty quoted by the Fed is the same as we feel and it has very much to do with the geopolitical situation and ... oil prices," he said.

The ECB came under political pressure to cut rates but Mr Duisenberg responded by warning that economic recovery depended on member states tackling their deficits.

Philip Shaw, chief economist at Investec said: "The ECB's refusal to lower rates is only temporary. The governing council will make use of a face-saving breathing space for a month or two before cutting rates."

Ken Wattret, euroland economist at BNP Paribas, said Mr Duisenberg's remarks would put pressure on finance ministers to cut a deal on budget targets at its two meetings ahead of the bank's next rate meeting on 5 December.