BoE, ECB keep key rates unchanged

The Bank of England (BoE) kept its benchmark interest rate unchanged at a six-year high, with policymakers resisting calls for a cut on concern that rising oil and food prices will fan inflation.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, left the bank rate at 5.75 per cent, as predicted by all except three of the 61 economists surveyed by Bloomberg News. Most expect a reduction in February.

The decision suggests contagion from the US sub-prime mortgage market slump, which sparked the first run on a UK bank in more than a century, has yet to outweigh policy makers' concerns about inflation. The Bank of England's reluctance to follow the Federal Reserve in cutting rates sent the pound to a 26-year high against the dollar today.

"There's no question of the U.K. economy going into a tailspin, so my guess is they'll wait till after Christmas,'' said Steven Bell, chief economist at hedge fund GLC and a former UK Treasury official. "We will see a rate cut, and we will see more than one.''

The UK's benchmark is the highest among the Group of Seven industrialised nations. The Fed has cut its key rate 75 basis points since September, to 4.5 per cent.

Inflation Concern
King said on October 10 that the bank will not cut rates to "insulate the banking system''. Chief Economist Charles Bean said October 31 that policy makers "cannot afford to relax'' on inflation, which he said will accelerate next year after energy and food costs jumped.

The British Chambers of Commerce, which represents more than 100,000 companies, and the British Retail Consortium, accounting for 80 per cent of retailers, both said the central bank should cut its rate today. Next Plc, the UK's third-largest retailer, said yesterday it's "cautious'' about the outlook for spending.

The economy is slowing from its fastest pace since 2004. Service industries from banking to travel, the largest part of the economy, grew at the weakest rate in 4 1/2 years in October as financial services growth cooled, a survey showed November 5.

The decision to leave rates unchanged pushed up the pound to $2.1083 today, the highest since 1981. Manufacturing contracted the most in seven months in September as the pound's 7 per cent increase against the dollar this year made British exports more expensive.

ECB follows suit
The European Central Bank (ECB) kept its benchmark interest rate unchanged at 4 per cent on Thursday, as expected, while the ECB weighs the risk of rising inflation and concerns about economic growth due to the soaring euro.

ECB President Jean-Claude Trichet will present the ECB's latest economic assessment at a news conference at 1330 GMT, where he will also face questions about the euro's surge to record highs above $1.47.

Trichet said a month ago that inflation risks were to the upside but growth risks to the downside, a combination most economists think will make the ECB leave rates on hold until the end of 2008 [ECB/INT].

Still, a surprisingly large jump in October inflation has increased the risk of inflation staying higher for longer than the ECB earlier expected, and oil prices are at record highs.

The ECB also left its marginal lending rate, at which banks can get emergency overnight loans, unchanged at 5 percent and the deposit rate stayed at 3 per cent.

Record Debt
The housing market, where prices tripled in the past decade, is also starting to weaken as Britons struggle to repay record debt of 1.4 trillion pounds ($2.9 trillion). House prices dropped for a second month in October, the first back-to-back decline in more than two years, HBOS Plc, the country's biggest mortgage lender, said today.

King signaled concern on October 10 that price pressures still haven't been wrung out of the economy after inflation stayed below the bank's 2 per cent target for the past quarter. Oil rose above $98 per barrel for the first time yesterday and food costs in British stores increased the most in almost two years in October, a report showed.

"Inflation has come down, but it's still only slightly below the bank's target,'' said Jeavon Lolay, an economist at Lloyds TSB Group Plc in London, who predicted no rate change. ``They are not 100 per cent comfortable with it yet and may wait a few months to have more room for maneuver.'' Lolay predicts the Bank of England will cut in February.

King Accused
Former policy makers including Willem Buiter have accused King of not doing enough to shield financial services, an engine of economic growth for the past decade, from the US subprime mortgage slump.

King refused to follow the ECB and the Fed in providing extra cash to banks in August after credit costs surged. Northern Rock Plc then struggled to fund its business and faced a run on deposits, leading former policy maker Richard Lambert to liken the country to a "banana republic.''

King said in an interview with BBC Radio 4 aired Nov. 6 that banks may take months to publish their full losses. Royal Bank of Scotland Group Plc and Barclays Plc may write down 2.1 billion pounds ($4.4 billion) in the second half, Sanford C. Bernstein & Co. estimated yesterday.

The central bank panel may have split on today's decision. Policy makers discussed a reduction in October, but only David Blanchflower voted for one. Their views may become clearer when the bank releases economic forecasts on November 14, and minutes of today's decision a week later.

King and Bean have already said the economy is poised to cool further. The International Monetary Fund on October 17 cut its prediction for U.K. growth next year to 2.3 per cent from 2.7 per cent previously.

"They have to cut rates, it's just a matter of time,'' said Chiara Corsa, an economist at UniCredit Italiano SpA in Milan, who predicted a reduction today. "We are forecasting a significant slowdown in growth.'