Rate moves by Bank and ECB disappoint

Hopes of a sustained campaign of interest rate cuts faded yesterday as the Bank of England left rates on hold and the European Central Bank disappointed observers with a modest quarter-point cut. But analysts said another easing in monetary policy was round the corner in the UK and eurozone, which could be joined by the US Federal Reserve.

The Bank of England announced its decision first, saying its Monetary Policy Committee had voted to keep the base rate at a 48-year low of 3.75 per cent. A run of poor data, including a slowdown in growth in retail sales and houses and signs of stagnation in the services sector had prompted speculation of another cut after February's surprise move.

There was fresh evidence yesterday as the Recruitment and Employment Confederation said demand for staff had stagnated in February and the motor industry reported a 6 per cent decline in new car sales. However, economists said the inflationary impact of the 4 per cent fall in the pound over the past month had stayed the hand of the majority of MPC members.

Business organisations reacted calmly to yesterday's decision but urged the Bank to stand ready to cut again amid signs of faltering consumer confidence and economic growth. Ian McCafferty, the chief economic adviser at the Confederation of British Industry, described the Bank's decision as sensible. "However, the MPC needs to watch closely for signals showing the economy taking a further turn for the worse in the coming months," he said.

David Frost, the director general of the British Chambers of Commerce, said: "We accept this decision as being in the best interests of the UK economy. The Bank has shown itself capable of responding to the needs of businesses by being prepared to cut rates when it sees a threat to demand."

The financial markets are pricing in a further half-point in rates by the end of this year. Helen Roberts, head of government bonds at the investment house F&C, said: "The consensus is that the next cut will be in May when the next Inflation Report is published."

While there was little market reaction to the Bank's decision, stock markets fell across Europe after the ECB disappointed hopes that it would act decisively to aid the eurozone economy with a half-point cut. Instead it decided to shave a quarter-point off its main rate, taking it to 2.5 per cent – the lowest level since it was founded more than four years ago.

Wim Duisenberg, the ECB president, had prepared the ground for a cut at last month's G7 finance ministers' meeting when he cast doubt over the prospect of an economic recovery this year.

Yesterday, he refrained from his usual practice of describing the current level of rates as "appropriate", instead hinting the ECB was ready to cut again.

"Depending on further developments, the governing council stands ready to act decisively and in a timely manner," he said. "We deliberately avoided the word 'appropriate' because that would give a sort of consolidation idea which we simply don't have."

Mr Duisenberg hinted the bank had cut its growth assumption for the 12-nation area this year to just 1 per cent. The gloomy message was echoed by the European Commission, which yesterday said the economy may contract in the current quarter.

Martin Essex, a senior economist at Capital Economics, said rates could fall as low as 1.5 per cent this year. "Another rate cut may well be imminent and could be agreed as soon as next month," he said.

Yesterday's decisions widened the gap between British and eurozone interest rates to 1.25 percentage points, which will be seen as a barrier to economic convergence ahead of UK entry into the euro.

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