ECB, Bank of England Leave Rates on Hold

The European Central Bank kept interest rates on hold Thursday, leaving the key policy rate at 4% as expected. Earlier in the day, the Bank of England left its key interest rate unchanged at 5.75%.

The ECB didn't provide any immediate rationale for the decision, but ECB President Jean-Claude Trichet is due to hold a news conference at 1:30 p.m. GMT (8:30 a.m. EST).

Last month, he reiterated that financial market turbulence made it necessary for policymakers to "gather additional information and examine new data before drawing further conclusions for monetary policy," prompting most economists to predict the ECB would maintain a wait-and-see stance until next year.

Of the 51 financial institutions surveyed by Dow Jones Newswires over the past week, 50 predicted the bank would leave rates unchanged Thursday. The sole dissenter said rates would rise.

Observers will listen keenly for any remarks Mr. Trichet may make on the rapid advance of the euro after the European currency hit a record high of $1.4705 Wednesday.

In the recent past, Mr. Trichet has limited his comments on the euro's strength to reiterating the sentiment of the Group of Seven leading industrial nations that excess volatility in exchange rates is "very counterproductive" for global growth. He has also noted it is "important" that U.S. officials have said a strong dollar is in the U.S.'s own interest. But given the fast ascent of the euro in recent days, Mr. Trichet may decide to veer from the script. In January 2004, Mr. Trichet described foreign exchange rate movements as "brutal," which stemmed the rise of the euro at the time.

Observers will be watching for verbal intervention by the ECB as well as any trace of innuendo regarding currency intervention. In addition, the market will be listening closely to Mr. Trichet's remarks on inflation, after numerous ECB Governing Council members said recently that inflationary pressures in the 13-member euro zone are rising. Economists have noted that policy decisions are becoming more complex for the ECB as inflation rises while economic growth is expected to soften next year.

The ECB has said since early in the year that inflation will accelerate at the end of 2007 and in early 2008 before tapering off again. It also emphasizes its medium-term approach to containing inflation.

However, the sharp spike in inflation in September was stronger than expected, and council members such as Axel Weber have warned that additional policy tightening may become necessary to counteract rising consumer prices. In September, the euro-zone's inflation rate jumped to 2.6% on the year from 2.1% in August.

"The impact on 2008 forecasts is likely to be substantial, and has definitely put the focus back on the ECB," Merrill Lynch said in a recent note. ECB and euro-zone national central banks staff will release fresh economic projections on Dec. 6.

At the press conference, Mr. Trichet will likely again cite oil and food prices, labor markets and wage developments, indirect taxes, as well as pricing power in noncompetitive market segments as price risks. He is also expected to repeat that upward risks to price stability prevail. In October, Mr. Trichet said the ECB would monitor price risks "very closely," and he is also expected to reiterate this stance.

Turning to monetary developments, Mr. Trichet is expected to note that strong underlying monetary and credit expansion point to price stability risks over the medium to longer-term.

Broad M3 money supply growth was up 11.5% on year in the July-September period, following the June-August rate of 11.4%. Both figures are well in excess of the ECB's 4.5% reference value it considers in line with benign inflation. The ECB's primary mandate is to maintain price stability, which it defines as an inflation rate just below 2%.

BOE Keeps Key Rate Unchanged

The Bank of England left its key interest rate unchanged at 5.75% following a two-day monthly meeting of its monetary-policy committee.

The decision was broadly expected. In a Dow Jones Newswires survey last week, 16 of the 18 economists polled forecast the committee would keep rates on hold.

The bank announced its decision without comment, noting only that its quarterly inflation report with new economic forecasts will be published on November 14, while the minutes of this week's meeting will be published on Nov. 21.

The monetary-policy committee last raised the bank rate from 5.5% in July, marking its fifth quarter-point increase since August 2006.